A Taiwan firm which is the world's biggest contract maker of computer chips has signed a deal to build a huge factory in China.

The deal means that one of the mainstays of Taiwan's economy has joined the rush of Japanese, US, European and Asian hi-tech firms flocking to shift production to China.

Taiwan lifted restrictions on investment in China by the semiconductor industry in March, after China and Taiwan both joined the World Trade Organisation.

Taiwan Semiconductor Manufacturing Co (TSMC) said its investment in China still needs approval from the Taiwan government, and has refused to give financial details.

Workers' fears

However, work has started on the site in the Chinese city of Shanghai according to city officials quoted in the Taiwan-based Commercial Times newspaper.

The factory will reportedly turn out 40,000 eight-inch wafer chips a month.

That is equal to 17% of the mammoth chip maker's output of the eight-inch chips during the three months of April, May and June.

The latest technology must stay in Taiwan

Key US and Japanese tech firms outsource production to TSMC, which is one of the world's top four makers of computer chips.

Manufacturing semiconductor chips accounts for half of Taiwan's industrial output.

Workers from chip plants held protests against the government's decision to lift restrictions on investment in the mainland.

But companies are keen to take advantage of cheaper labour costs in China and tax breaks offered by mainland authorities.

To offset fears about the hollowing out of Taiwan's economy, the government restricted investment in China to eight-inch chips.

Firms must also already be making the more up-to-date 12-inch chips in Taiwan.

The news came as Taiwan opened its economy further to Chinese advertisers and eased rules on staff of Chinese firms working in Taiwan.