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Cablegate: Taipei Economic Brief for June 2007

VZCZCXRO3075
RR RUEHGH
DE RUEHIN #1575/01 1962329
ZNR UUUUU ZZH
R 152329Z JUL 07
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC 5985
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUCPDOC/USDOC WASHDC
RUEHBK/AMEMBASSY BANGKOK 3751
RUEHBJ/AMEMBASSY BEIJING 7024
RUEHUL/AMEMBASSY SEOUL 8770
RUEHGP/AMEMBASSY SINGAPORE 6940
RUEHKO/AMEMBASSY TOKYO 8925
RUEHML/AMEMBASSY MANILA 0096
RUEHJA/AMEMBASSY JAKARTA 4096
RUEHKL/AMEMBASSY KUALA LUMPUR 3776
RUEHHI/AMEMBASSY HANOI 3345
RUEHBY/AMEMBASSY CANBERRA 4554
RUEHWL/AMEMBASSY WELLINGTON 1824
RUEHHK/AMCONSUL HONG KONG 8271
RUEHGH/AMCONSUL SHANGHAI 1226
RUEHGZ/AMCONSUL GUANGZHOU 0403

UNCLAS SECTION 01 OF 03 TAIPEI 001575

SIPDIS

SIPDIS

STATE PLEASE PASS USTR
STATE FOR EAP/RSP/TC, EAP/EP
USTR FOR ALTBACH AND STRATFORD
USDOC FOR 3132/USFCS/OIO/EAP/WZARIT
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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 PINR TW
SUBJECT: Taipei Economic Brief for June 2007

1. This cable summarizes selected June 2007 economic events in
Taiwan:
--Taiwan's Economic Performance Improved
--Taiwan Approves IC Packing Firms' China Investment
--Taiwan Passes 2007 Central Budget
--Individual Debt Resolution Law
--Incentives for Biotech Industry
--Retiree Service Market to Expand
--Green Energy Output to Reach US$20 billion by 2015
--Incentives to Attract Foreign Expatriate Specialists

Taiwan's Economic Performance Improved
--------------------------------------

2. Taiwan has improved its economic performance in the second
quarter (Q2) of this year with the island's real GDP y-o-y growth
increasing to 4.4%, up from 4.15% in Q1, according to Taiwan
official estimates. Imports of capital goods, an indicator of
investment, reversed a decline in Q1 to growth in Q2. During
April-May, foreign investment also reported a 75% y-o-y growth, and
manufacturing production growth accelerated, although export growth
slowed. In the first five months of 2007, the inflation rate
remained below one percent, and the unemployment rate of 3.8% set a
six-year low for the Jan-May period.

3. Both official and private think thanks are optimistic about
Taiwan's economy for the rest of this year. The Directorate General
of Budget, Accounting and Statistics predicted Taiwan's year-on-year
economic growth will rise from 4.15% in Q1 to 4.67% in Q4. Academia
Sinica expects an even higher growth rate of 4.79%. A survey
published by the Taiwan Institute of Economic Research in late June
showed 40% of manufacturing firms anticipated better performance
over the next six months, while 18% predicted worse performance.
According to Taiwan's central bank, booming real estate and stock
markets, together with resolution of delinquent credit/cash card
debt problems, will stimulate private consumption. Exports will
continue to expand as demand from Japan, Europe, and China will
remain strong.

Taiwan Approves IC Packing Firms' China Investment
--------------------------------------------- -----

4. The Investment Commission approved China investment applications
from four IC packing companies on June 28, including Siliconware
Precision Instrument, Walton Advanced Engineering, Greatek
Electronics, and Advanced Semiconductor Engineering. Their combined
investment in China will be US$99.6 million. Meanwhile, these four
companies promised to invest NT$75 billion (US$2.3 billion) in
Taiwan, and their Taiwan projects are expected to create 6,500 jobs.
In April 2006, Taiwan lifted the ban on investment in China by
low-level integrated circuit (IC) packaging firms.

Taiwan Passes 2007 Central Budget
---------------------------------

5. Taiwan's Legislative Yuan (LY) passed the 2007 central budget on
June 15. The LY cut 2.1% in funding proposed by the Executive Yuan
(EY) for 2007 administrative programs. The 2007 cuts included a 40%
slash in special allowance (pocket money) for the President, a 20%
slash in information technology equipment (hardware) procurement,
and an 18% cut in outsourcing funding. The LY removed the 2007
privatization program by cutting NT$20.1 billion (US$609 million)
from sales of equity shares in state-owned enterprises. The budget
legislation passed 197 days after the November 30, 2006 deadline set
by Taiwan's Budget Law. According to official estimates, due to the
delay in budget legislation and the consequent delay in funding
major public constructions projects, Taiwan's real GDP growth in the

TAIPEI 00001575 002 OF 003


first half of this year was 0.25-0.3 percentage points below the
level if the funding would have been available.

Individual Debt Resolution Law
------------------------------

6. Taiwan completed legislation of the Individual Debt Resolution
Law (IDRL), which goes effective in early 2008. The law, designed
mainly to assist delinquent credit/cash card debtors, will permit
insolvent individuals to reschedule debt payments and make payments
covering only 20% of their total outstanding unsecured debt with
long payment terms. When that portion of the debt is repaid, the
debtors can request the court dissolve the remainder of the debt
obligation. With banking sector insistence, individuals already
reaching rescheduling agreements with banks will be excluded from
the coverage of the law. A provision covering mortgage loans was
also deleted. Observers believe the law will erode the banking
sector's profitability and lead to banks tightening unsecured loans.


Incentives for Biotech Industry
-------------------------------

7. The Ministry of Finance (MOF) agreed to a draft law entitled the
"Statute for Development of Biotechnology and New Medicine Industry"
proposed by the Ministry of Economic Affairs. The draft law will
extend tax incentives for the biotechnology industry after the
Statute for Upgrading Industries expires in 2009. According to the
draft law, investors in biotech and pharmaceutical industries will
continue to be entitled to five-year tax credits for their R&D and
training programs. New in the draft, the tax credits will start
from when the ventures begin reporting profits. Also new, tax
deductions will be available to corporate shareholders for their
investments in biotechnology and development of new medicines.
High-level professional and technical experts in this sector will be
permitted to defer taxes on stock dividends until the shares are
sold.

Retiree Service Market to Expand
--------------------------------

8. The Council for Economic Planning and Development (CEPD)
published a retiree service market study which concluded a retiree
service market is emerging in Taiwan, as the population reaching the
retirement age of 65 will increase from 2.3 million today to an
estimated 2.9 million ten years from now. Compared to other age
groups, retirees are richer and will require more health care, safe
and comfortable housing, and travel services. A sharp increase in
spending by retirees will lead to substantial growth of medical care
and related sectors, health food, and travel industries. CEPD
estimates their growth will create 83,000 jobs by 2015.

Green Energy Output to Reach US$20 billion by 2015
--------------------------------------------- -----

9. In early June 2007, Economic Minister Steve Chen reported
Taiwan's energy policy to the Presidential Office. By 2015,
Taiwan's target for enewable energy output will reach US$20 billion,
or 3% of the global total. The Ministry of Economic Affairs (MOEA)
has set a goal that by 2010, electricity generated from renewable
energy will increase to 512.9 kilowatts, accounting for 10% of
Taiwan's total installed capacity. Renewable energy development
will be focused on wind power, solar photovoltaic, terrestrial heat,
hydraulic power, and biomass fuels in the short term and move on to
hydrogen energy and fuel cells in the long term. Currently, 168
solar photovoltaic power systems are under construction. Beginning
this year, city buses in Kaohsiung and Chiayi County will run on

TAIPEI 00001575 003 OF 003


bio-diesel fuel. Gas stations in Taoyuan and Chiayi will begin to
supply B1 diesel fuel, and those in Taipei City will supply E3
ethanol gasoline. B1 diesel fuel will be available island-wide in
2008, and B2 diesel fuel in 2010, and E3 ethanol gas in 2011. By
2010, solar cells, biomass and wind generation will provide
approximately 3.48 billion kilowatt hours for nearly 870,000
households in Taiwan.

Incentives to Attract Foreign Expatriate Specialists
--------------------------------------------- -------

10. On June 27, the Council for Economic Planning and Development
(CEDP) approved a set of measures to attract foreign expatriate
specialists to fill a high-tech labor shortage of 34,000 over the
next three years. With these measures, Taiwan will provide foreign
expatriate specialists tax incentives and permit their PRC-national
family members join them in Taiwan and enroll in local schools. Tax
rates on stock dividends distributed to foreign expatriate
specialists (currently 25%) and capital gains from property
transactions (currently 35%) will be lowered to 20%. Household
allowances (including air travel, home leave, moving expenses, rent,
and school fees) paid by companies will be considered tax free.
(Note: CEPD may be currently revising these proposed measures to
cover a more broadly defined group of expatriates.)

YOUNG

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