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Analysis China's recent moves to attract Taiwanese investors have drawn a favorable reaction from the island's technology sector, but many say they do not expect to see significant effects, because companies have already found ways around investment barriers.

New regulations, announced yesterday (Dec 12), offer Taiwan's investors better legal protection, easier bank loans, tax credits, and other benefits similar to those enjoyed by local companies. An effective state of war has existed between Taiwan and China for the past fifty years. However, the two countries are close both geographically and culturally, making China an attractive low cost manufacturing site for Taiwan's companies.

"If they relax their restrictions that's good for us, of course," said James Lee, Vice President of Epox International, which makes about 150,000 PC motherboards per month. However, he added, local authorities in China have already offered his company investment incentives, apparently without consulting Beijing.

"Local governments in China are very eager to get investment from Taiwanese companies, they say they would give us extra benefits if we were affected by the [central government] regulations."

Epox does not currently manufacture in China, although it has set up a provisional office in Shanghai. Motherboard makers say China's cheaper labour costs bring them a saving of around two dollars per board - a significant proportion of the maximum ten per cent profit margin on motherboards, which sell for US$50 to $100 in volume.

Many companies which do have factories in China, may, ironically, not benefit from the new rules. Computer keyboard and CD-ROM maker, Behavior Tech Corporation (BTC) began manufacturing in China seven years ago, when Taiwan's government still placed severe restrictions on mainland investment, explains spokesman, Daniel Lee.

To get around the regulations, BTC, in common with many other companies, used personal investments from major shareholders to establish a holding company outside Taiwan, which then built factories in China. As a result, BTC's Chinese manufacturing operation is not officially a Taiwanese company, and will see little benefit from the new regulations. S

ome reports suggest Taiwanese indirect investment through third countries might in fact fall under the new rules. Lee said he could not confirm this, as he had not had a chance to study the subject in depth. "New regulations can't hurt, but I don't think they're going to have a big impact on capital flight," commented Paul Meyer of Credit Lyonnais Securities Asia.

"China doesn't have to do anything to encourage investment by Taiwanese electronics companies... most of the regulatory hurdles are on the Taiwan side, I think."

He noted that easing of loan restrictions, part of the reported regulatory shift, might help China more than Taiwan. "Chinese banks are dying to lend to Taiwanese companies because they know they'll actually repay the loans."

Internet companies could benefit from less stringent regulations, said Richard Tang, corporate marketing Director of Kimo, a Chinese-language web portal. "It certainly helps," he said, "The barrier for going into mainland China is that the local tax and the local laws don't really encourage Internet business. Right now if the door was open, we definitely would go in."

Kimo is currently using an alliance with NetEase, a mainland Internet company, to establish a presence in China. Taiwan's own restrictions on investment in China would eventually become a problem for Kimo, he said, "it would help if they remove those restrictions, so we can expand when we have a chance."

Many in the technology sector believe Taiwan will further relax rules on investment in China next year. Paul Meyer of Credit Lyonnais warned that much will depend on the enforcement and interpretation of China's new rules. "The trouble is that the laws are always changing there, and what actually happens is different from what the laws state," he said.

Taiwan's government, meanwhile, was harshly critical of the Chinese move, saying it was inspired by a sharp fall in foreign investment in China. Mere promises of greater legal protection would not necessarily change the situation on the ground, officials told local media. ®

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