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Cablegate: Economic Briefing for November 2005

This record is a partial extract of the original cable. The full text of the original cable is not available.







E.O. 12958: N/A
SUBJECT: Economic Briefing for November 2005

REF: (A) Taipei 4764; (B) Taipei 3572

1. This cable summarizes selected economic events in Taiwan
in November 2005:

--New accounting system for national income statistics

--Alternate Minimum Tax Bill

--Foreign investor acquires local bank

--Compulsory licensing for Tamiflu

--National Communication Commission

--Hong Kong-Taipei flights proposed

--Cross-Strait government co-investment

--Taiwan TFT-LCD panels

--Taiwan offshore production dominates IT

Taiwan adopts UN National Accounts System

2. In November, Taiwan replaced the 1968 version of the
U.N. System of National Accounts with an accounting system
based mainly on the 1993 U.N. System of National Accounts
(93SNA) in its compilation of national income statistics.
The 93SNA includes in gross domestic product (GDP) four
categories of expenses excluded from the 68SNA GDP. These
four categories are 1) mining exploration expenditure, 2)
computer software expenses (now treated as capital
formation), 3) banking services for government and
households, and 4) depreciation of public infrastructure
(now classified as final consumption). Consequently real
GDP growth in 2004 was changed from 6.06% to 6.07% and the
2004 per capita GDP increased by 5% from US$13,595 to
US$14,271. Based on the 93SNA, the Taiwan government
estimates the island's economic growth will rise from 3.80%
in 2005 to 4.08% in 2006. The 93SNA changes the components
of 2004 GDP to 72.73% for the service sector (up from 68.79%
based on the 68SNA), 1.68% for agriculture (down from
1.74%), and 25.58% for industries (down from 29.54%).

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Taiwan Legislature's First Reading of AMT

3. In late November the Legislative Yuan (LY) finished its
first reading of the Alternate Minimum Tax Bill. Under the
current version of the Bill, individuals with over NT$6
million (about US$180,000) income will be subject to a 20%
AMT. Three years after the new tax law is adopted, the AMT
will be expanded to include overseas income. The AMT
corporate tax rate will be 10-12% on income above NT$8
million (about US$240,000). About 15,000 people will be
required to pay the AMT according to an estimate by the
Ministry of Finance. The AMT is expected to cut listed
companies' profit margins by 3% to 5% and may affect
semiconductor, TFT, and other high-tech industries exempt
from most tax, more than other sectors. A recent Gallup
poll for CLSA showed broad support for the AMT.

First Foreign Acquisition of Local Bank

4. On November 28, Nassau Inn Investments Limited acquired
61% equity in Business Bank of Hualien (BBH) for a cost of
NT$1,000 million (US$30 million). This will be the first
foreign acquisition of majority ownership of a local bank
(most of the funds are reportedly from European and American
investors). The acquisition will help Taiwan resolve
problems at one of the eight banks designated by the
Financial Supervisory Commission (FSC) as targets for the
(now-defunct) Financial Reconstruction Fund. In September
2005, BBH failed to meet FSC requirements with a non-
performing loan (NPL) ratio of 10% and a capital adequacy
ratio of 1.4%. Nassau Inn is expected to improve and sell
BHH rather to hold and manage it.

Compulsory Licensing for Tamiflu Production

5. Taiwan's Intellectual Property Office (IPO) issued a
compulsory license for Tamiflu production to Taiwan's
Department of Health (DOH) on November 25 (ref A). The
authorization will be valid from November 25 to December 31,
2007. Tamiflu produced under the compulsory authorization
will be limited to use when products made by the
rightsholder Roche are insufficient to meet demand. DOH is
required to pay as yet undetermined royalties to Roche. At
present, Taiwan intends to buy from Roche only enough
Tamiflu to stockpile for 10% of the population.

National Communication Commission (NCC)

6. In late November 2005, the ruling party nominated ten
NCC commissioner candidates and the opposition parties
proposed eight. The 18 candidates include National Chengchi
University (NCU) Mass Media College Dean Wong Shiu-chi
(nominated by the ruling DPP party), NCU Law Professor Su
Yung-ching (nominated by the opposition KMT Party), and
former KMT-owned China Broadcasting Company President Liu
Chu-yuan (nominated by the opposition PFP Party). The NCC
Commissioner Review Committee will select 13 out of the 18
candidates to constitute the NCC in the next few weeks.

Flights from Hong Kong to Downtown Taipei Airport Proposed
--------------------------------------------- -------------

7. In mid November, 116 legislators including DPP, KMT and
PFP members, proposed opening downtown Taipei's Sungshan
Airport to flights from Hong Kong and Macao. Far Eastern
Air Transport and TransAsia Airways both voiced support for
the proposal. The Ministry of Transportation and
Communications has also expressed its support, and the Civil
Aviation Administration (CAA) is doing a feasibility
evaluation. The CAA has indicated that the proposal will
require approval by the Mainland Affairs Council (MAC) and
national security agencies. On November 16, legislators
froze the MAC operating budget for 2006 pending approval of
Hong Kong and Macao flights at Sungshan Airport among other

Cross-Strait Flag Carriers Co-invest

8. Taiwan's government-controlled China Airlines (CAL)
announced November 15 plans to acquire a 20-percent
stake in Hong Kong-based China Aircraft Service Ltd.
(CAS). CAS is an aircraft maintenance and cleaning
service provider with (PRC government-owned) Air China,
(US) United Airlines and (Hong Kong) Hutchison Whampoa
Limited as major shareholders. Air China is the
largest shareholder with a 53-percent stake. In
addition, the Ministry of Economic Affairs approved
another Mainland investment proposal from CAL and two
Taiwan shipping companies, Wan Hai Lines and Yangming
Marine Transport, to purchase a 43 percent stake in the
PRC government-invested cargo airline, Yangtze River
Express (ref B).

Taiwan TFT-LCD Manufacturers Investing in PRC

9. On November 14, Taiwan's Chunghwa Picture Tubes Ltd.
announced plans to purchase a 29-36 percent stake of China's
Xiamen Overseas Chinese Electronics Co., Ltd. (XOCECO). The
PRC firm manufactures televisions and monitors, sold
internationally under the "Prima" brand. The board of
Chunghwa Picture Tubes expects to complete the purchase
within six months. The sale would make Chunghwa Picture
Tube China's second largest LCD TV manufacturer. On
November 10, Taiwan's Toppoly Optoelectronics Corp. and
Royal Philips Electronics announced plans to form a new
company in China. Toppoly is a subsidiary of Taiwan's
Compal Electronics Group. Toppoly already has a TFT-LCD
display factory in Nanjing. Taiwan firms currently are not
permitted under Taiwan law to invest in TFT-LCD panel
manufacturing facilities in the PRC. However, there is no
prohibition against investment in manufacturing TFT-LCD
modules from imported panels.

10. The value of Taiwan-made large-scale TFT-LCD panels
will increase 31% this year to US$17.6 billion. Large-scale
TFT-LCD panel exports will reach 93 million pieces,
surpassing South Korea's exports of 88 million pieces. The
strong demand for LCD TVs, monitors, and laptop PCs, has
contributed to rapid expansion of Taiwan's TFT-LCD industry.
Taiwan's seven TFT-LCD producers took 45% of the world
market in the second quarter this year, and have plans to
invest an additional NT$120 billion (US$3.58 billion) in
construction of "7.5G" (the most advanced) plants. Corning
Inc. has decided to invest an additional US$450 million to
expand its glass substrate production facilities in Taiwan.
Taiwan's TFT-LCD industry has attracted up-stream suppliers
from Japan and South Korea to invest in Taiwan.

Taiwan IT Leads the World

11. Taiwan manufacturing firms are dominating world markets
through production bases in China, particularly for
information technology (IT) products. According the
Marketing Intelligence Center (MIC) of the Institute for
Information Industry, Taiwan companies dominated the
following IT product categories (with estimated 2005 global
market share in parentheses) : motherboard (98.3%), laptop
PC (82.4%), large scale LCD (46.9%), WLAN cards (89%),
wireless access point (59%), VoIP IP phones (77%), customer
premise equipment (75%), and internal VOIP phone routers
(83%). The MIC estimates that Taiwan's IT hardware outputs,
excluding semiconductors, will increase by 15 percent this
year to US$80 billion and by 9.5 percent in 2006 to US$87.5
billion. Laptops, with an output of US$30.2 billion, are
the most valuable IT products. A recent survey conducted by
the Ministry of Economic Affairs showed that 71.7% of export
orders for Taiwan IT products were manufactured overseas,
mainly in China.


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