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Cablegate: Taipei Economic Brief for December 2007

VZCZCXRO3593
RR RUEHGH
DE RUEHIN #0007/01 0030614
ZNR UUUUU ZZH
R 030614Z JAN 08
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC 7711
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUCPDOC/USDOC WASHDC
RUEHBK/AMEMBASSY BANGKOK 3931
RUEHBJ/AMEMBASSY BEIJING 7610
RUEHUL/AMEMBASSY SEOUL 9139
RUEHGP/AMEMBASSY SINGAPORE 7103
RUEHKO/AMEMBASSY TOKYO 9374
RUEHML/AMEMBASSY MANILA 0232
RUEHJA/AMEMBASSY JAKARTA 4158
RUEHKL/AMEMBASSY KUALA LUMPUR 3833
RUEHHI/AMEMBASSY HANOI 3413
RUEHBY/AMEMBASSY CANBERRA 4678
RUEHWL/AMEMBASSY WELLINGTON 1944
RUEHHK/AMCONSUL HONG KONG 8881
RUEHGH/AMCONSUL SHANGHAI 1576
RUEHGZ/AMCONSUL GUANGZHOU 0759

UNCLAS SECTION 01 OF 04 TAIPEI 000007

SIPDIS

SIPDIS

STATE PLEASE PASS USTR
STATE FOR EAP/RSP/TC, EAP/EP
USTR FOR KATZ AND STRATFORD
USDOC FOR 3132/USFCS/OIO/EAP
TREASURY FOR OASIA/TTYANG AND HAARSAGER
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF
GOVERNORS, SAN FRANCISCO FRB/TERESA CURRAN, AND NEW YORK FRB MARI
BOLIS

E.O. 12958: N/A
TAGS: EINV EFIN ECON SENV TW
SUBJECT: Taipei Economic Brief for December 2007

1. (U) Summary. This cable summarizes selected December 2007
economic events in Taiwan. Better than expected economic
performance led to upward adjustment of Taiwan's estimated 2007 real
GDP growth which, however, will slow in 2008 due to effects of U.S.
sub-prime mortgage situation and higher import costs....Taiwan
authorities set ambitious economic development goals for 2008 and
increased rent subsidy funding for investment projects....The 2008
central budget was enacted before the legal deadline of December
31....Taiwan's central bank raised interest rates to fight
inflation....Second direct cross-Strait charter flight was launched
one and a half year after the first one....The National
Communications Commission Organization Law was amended to comply
with Taiwan's Constitution....Legislation authorizes taking
foreigners' bio-data at the time of entry....Insurance firms'
overseas investment limit raised....Restrictions on foreign mutual
funds relaxed....Walden International of the U.S. and JSR of Japan
will increase investment in Taiwan....TECO becomes first to go into
software OEM....END SUMMARY.

Performance Better Than Expected
--------------------------------
2. (U) Unexpectedly strong economic performance in the second half
of 2007 has prompted both domestic and foreign forecasters to raise
Taiwan's 2007 real GDP growth estimates to 5.2-5.5%, up from the
below 4.5% rate predicted three-six months earlier. Year-on-year
export growth increased from 7.6% in the fourth quarter of 2006 to
14.4% in October-November. Meanwhile, growth in export orders rose
from 9.6% to 17.6%, and growth in manufacturing production
accelerated from 0.5% to a three-and-a-half-year high of nearly 15%.
Unemployment was 3.87%, the second-lowest for the month of November
over the past seven years. Three tropical storms during
August-October, together with higher import costs for crude oil,
grains and dairy products, drove up Taiwan's inflation rate from nil
early this year to 5.3% in October and 4.8% in November.

Economic Growth Slows in 2008
-----------------------------
3. (U) Most Taiwan forecasters anticipate that Taiwan's economic
growth in 2008 will slow to below 4.5%. They believe that the U.S.
sub-prime mortgage problem, as well as higher international prices
for oil and grains, will dampen world economic performance and
reduce demand for products from the export-oriented economy of
Taiwan. The Taiwan Research Institute (TRI) predicted that real
export growth in 2008 will drop to 3.96% from an estimated 7.2% in
2007, and the Academia Sinica expected the growth rate will decline
to just above 3%.

Official Goals for 2008
-----------------------
4. (U) Despite slow growth prospects for next year, Taiwan
authorities still set optimistic economic development goals for
2008: economic growth at 4.8%, unemployment below 3.8%, and
inflation less than 2%. Per capita GDP will increase from 2007's
estimated US$16,768 to US$18,000. To achieve these goals, the
Ministry of Economic Affairs (MOEA) set a 7.3% growth target for
private manufacturing investment, mainly in information technology
(IT) and electronics. The MOEA will increase rent subsidies for
investment projects in industrial parks. Meanwhile, the Council of
Labor Affairs will increase the monthly subsidy for employment of a
jobless worker from NT$5,000 to NT$10,000 (US$307), effective
January 1, 2008. The length of the subsidy will be 12 months.

2008 Private Investment Target: NT$1.08 Trillion
--------------------------------------------- ---
5. (U) The MOEA will raise its private manufacturing investment
target to NT$1.08 trillion (US$32.8 billion), up 7.3% from the 2007
target of NT$1.006 trillion. According to the MOEA's projection,

TAIPEI 00000007 002 OF 004


investment in metals and electronic tools will enjoy the highest
growth in 2008, while IT and electronics will contribute 51% of 2008
private investment, including NT$220 billion (US$6.77 billion) in
flat panels. Chi Mei Optoelectronics will start building an 8th
generation plant, and AUO will launch a 7.5 generation plant
project. A target of NT$260 billion (US$8 billion) is set for the
semiconductor industry, mainly new 12-inch fabs, including one to be
built by Chunghwa Picture Tubes in central Taiwan. A target of
NT$296.9 billion (US$ 9.1 billion) has been set for the metals and
electronic tools industry, up 23% over the 2007 target, mainly due
to strong demand for tool machinery.

Subsidy for Investment in Industrial Parks
------------------------------------------
6. (U) The MOEA will increase its rent subsidy funding for
investment projects in industrial parks. The program, nicknamed the
"006688 Program" (i.e., rent free for the first two years, 40%
discount for the next two years, and 20% discount for the fifth and
sixth years), has attracted many investors, including overseas
Taiwan firms. With funding of NT$110 billion (US$3.38 billion), the
program has attracted 851 companies to rent 590 hectares of land in
industrial parks, which has generated NT$355 billion (US$10.95
billion) in investment and created 65,000 jobs. The MOEA will add
NT$20 billion (US$615.5 million) to the program. Companies
currently considering using the 006688 Program include Fujitsu,
which is planning an upcoming WiMAX project, and a Taiwan
optoelectronics firm.

2008 Central Budget Enacted before Legal Deadline
--------------------------------------------- ----
7. (U) Taiwan's Legislative Yuan (LY) passed the 2008 central
budget in late December, for the first time in eight years complying
with the law to enact the budget bill before the end of a year. The
LY cut proposed expenditure by 0.8% to NT$ 1,686 billion (US$51.9
billion), and the 0.8% cut was the smallest in past ten years. The
LY also approved the budget for military procurement projects,
including four sets of Patriot III missiles and funding to assess
submarine procurement. The six sets of Patriot III missiles require
funding of NT$21.9 billion (US$673.8 million). Funding to assess
submarine procurement is NT$2 billion (US$61.5 million). Funding
for P3C anti-submarine aircraft is NT$1.7 billion (US$52.3
million).

CBT Raised Interest Rates to Fight Inflation
--------------------------------------------
8. (U) The Central Bank of ROC (Taiwan) raised its benchmark rates
by 0.125 percentage points in an effort to fight inflation, which
rose in the second half of this year. The MOEA helped fight
inflation by freezing gasoline prices, although the cumulative
increase in crude oil import costs in November crossed the 12%
threshold for the upward adjustment of gasoline prices. During
August-October, three tropical storms pushed up produce prices by
50-100%, with some vegetable prices even tripling. Produce prices
declined to normal levels in late November. Crude oil import costs,
however, rose to over US$90 per barrel, and grain import prices were
increasing steadily. Consequently, Taiwan's inflation rate measured
by the consumer price index rose from almost nil in early 2007 to
5.3% in October and 4.8% in November.

Second Direct Cross-Strait Cargo Flight
---------------------------------------
9. (U) State-owned China Airlines (CAL) launched a second round of
direct cross-Strait cargo flights on December 12. Contracted by
ProMOS Technologies of Taiwan, CAL transported eight-inch silicon
wafer manufacturing equipment to Chongqing, China. The first direct
cross-Strait cargo flights took place in July 2006.


TAIPEI 00000007 003 OF 004


NCC Organization Amended to Comply with Constitution
--------------------------------------------- -------
10. (U) The LY completed the third and final reading of amendments
to the National Communications Commission (NCC) Organization Law in
late December. According to the legislation, NCC Commissioners
shall be nominated by the Premier and approved by the Legislative
Yuan. The number of NCC commissioners will be reduced to seven from
13, and a single political party may not hold over half of the total
Commissioner seats. All NCC members have tendered their
resignations effective January 1, 2008. Late last year, the Supreme
Court handed down a judgment that the method for selecting
commissioners is unconstitutional and that the current NCC shall
cease to function in January 2008. Before amendment, the National
Communications Commission Organization Law prescribed that NCC
members shall be proportionally allocated to political parties based
on the number of seats in the LY.

Anti-terrorism Legislation
--------------------------
11. (U) The LY passed the third and final reading of a bill to
amend the Immigration Law. The legislation authorized Taiwan's
Immigration Administration to take bio-data (including fingerprints)
of foreigners at the time of entry. A bio-data identification
system will be implemented in 2009. The legislation will permit
victims of domestic abuse to continue staying in Taiwan after the
court issues a protection order. The amended law will prohibit
cross-border marriage brokerage.

Insurance Firms' Overseas Investment Limit Raised
--------------------------------------------- ----
12. (U) The Financial Supervisory Commission (FSC) raised the limit
on an insurance company's offshore investment from 35% to 45% of
total insurance funds if the company's paid-in capital exceeds 300%
of the risk-based assets. The FSC also removed a ban on offshore
real estate investment by insurance firms which, however, is subject
to a cap of 10% of net worth. The liberalization measures will
increase Taiwan insurance sector's offshore investment by an
estimated NT$700 billion (US$21.5 billion) and, therefore, drive up
Taiwan's long-term interest rates.

Restrictions on Foreign Mutual Funds
------------------------------------
13. (U) The FSC relaxed restrictions on foreign mutual funds in
Taiwan. The ceiling limit on financial derivatives held by a
foreign mutual fund was raised from 15% of net worth to 40%. The
FSC also removed a ban on foreign mutual funds trading in financial
derivatives. With the relaxations, many additional foreign mutual
funds may be sold in Taiwan.

Walden International to Increase Taiwan Investment
--------------------------------------------- -----
14. (U) During its 20th anniversary ceremony, Walden International,
a venture capital firm based in San Francisco, announced that it
will increase its investment in Taiwan's biotech and high-tech
industries by NT$10 billion (US$308 million). Walden, which
operates a capital fund worth nearly US$2 billion, has been active
in Asian markets. Walden currently provides capital funding to
several prominent Taiwan semiconductor companies (including
Powerchip Semiconductor and TICP) and IT manufacturers such as
ZyXel, E-Ten, and Hitron Technologies. Walden, one of Taiwan's
venture capital pioneers, formed its subsidiary in Taiwan in 1987.

JSR's Expansion Project
-----------------------
15. (U) JSR of Japan, the world's largest producer of color resists
for TFT-LCD screens, announced it will increase its investment in
the Central Taiwan Science Park (CTSP). It will add production

TAIPEI 00000007 004 OF 004


lines for semiconductor and optoelectronics materials. JSR invested
nearly NT$800 million (US$24.6 million) in 2006 to set up JSR Micro,
the company's Taiwan subsidiary located at CTSP, to supply photo
spacers, protective film and alignment film to Taiwan's major flat
panel makers, including AUO, Chi Mei Optoelectronics, Hannstar, and
Chunghwa Picture Tubes. During the first stage of its factory
launch, JSR Micro focused mainly on the production of color resists,
where it holds 60% of the Taiwan market. Its presence in Taiwan has
given such companies as AUO and Chi Mei quick access to materials,
allowing them to enjoy a competitive edge in the world market.

First Software OEM in Taiwan
----------------------------
16. (U) TECO Group, a Taiwanese multinational business
conglomerate, will enter an OEM software joint venture with Intec
Group, Japan's second-largest IT services provider, and Nihon
Technos, a major human resources company in Japan. Recently, TECO
signed an agreement with these two Japanese firms to form Dongyingte
International, which will become the first OEM software provider for
Japanese companies. The initial investment will be NT$56 million
(US$1.7 million). TECO will contribute 60% of the capital, while
Intec Group and Nihon Technos each hold a 20% stake. The joint
venture is expected to bring in earnings of NT$30 million (US$0.9
million) from the Japanese software OEM market during its first
year, and achieve yearly revenues of NT$100 million (US$3 million)
over the next four years. The joint venture will focus on software
applications for finance, banking, public institutions, medical
care, and CRM (Customer Relationship Management).

WANG

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