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Cablegate: Taipei Economic Brief for July 2007

VZCZCXRO6637
RR RUEHGH
DE RUEHIN #1697/01 2120838
ZNR UUUUU ZZH
R 310838Z JUL 07
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC 6186
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUCPDOC/USDOC WASHDC
RUEHBK/AMEMBASSY BANGKOK 3783
RUEHBJ/AMEMBASSY BEIJING 7073
RUEHUL/AMEMBASSY SEOUL 8796
RUEHGP/AMEMBASSY SINGAPORE 6957
RUEHKO/AMEMBASSY TOKYO 8954
RUEHML/AMEMBASSY MANILA 0115
RUEHJA/AMEMBASSY JAKARTA 4111
RUEHKL/AMEMBASSY KUALA LUMPUR 3791
RUEHHI/AMEMBASSY HANOI 3362
RUEHBY/AMEMBASSY CANBERRA 4572
RUEHWL/AMEMBASSY WELLINGTON 1847
RUEHHK/AMCONSUL HONG KONG 8320
RUEHGH/AMCONSUL SHANGHAI 1250
RUEHGZ/AMCONSUL GUANGZHOU 0428

UNCLAS SECTION 01 OF 03 TAIPEI 001697

SIPDIS

SIPDIS

STATE PLEASE PASS USTR
STATE FOR EAP/RSP/TC, EAP/EP
USTR FOR ALTBACH AND STRATFORD
USDOC FOR 3132/USFCS/OIO/EAP
TREASURY FOR OASIA/TTYANG
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 July 2007

1. This cable summarizes selected July 2007 economic events in
Taiwan:

--Standard Chartered Raises Taiwan's GDP Growth
--Improved Economic Performance, Inflationary Threat
--Penalty on UMC for Investment in China Overruled
--Medical Tourism
--Fubon Intends to Acquire PRC Bank
--Taiwan Ranks Sixth in World IT competitiveness
--Taiwan DRAM Manufacturers Top World Market
--Bayer Acquires Taiwan Resins and Films Producer
--Double Taxation in EPZs Removed
--Science Park to Allow Industry Services

Standard Chartered Raises Taiwan's GDP Growth
---------------------------------------------

2. Standard Chartered (Taiwan) raised its 2007 real GDP growth
forecast for Taiwan from 4.1% to 4.5%, attributing the rise mainly
to accelerated private consumption growth. Expansion of private
consumption, stimulated partly by a rise in stock prices and partly
by resolution of credit/cash card debt problems, also prompted the
Taiwan Institute of Economic Research (TIER) to increase Taiwan's
estimated growth to 4.21% from April's 4.09% projection. Goldman
Sachs is more optimistic than other forecasters, projecting the
growth rate will further rise from 4.5% in 2007 to 5.5% in 2008.
All of these groups anticipate that increases in the prices of
imported grain and crude oil will drive up inflation from below one
percent in the first half (H1) of this year to over two percent in
H2, with TIER's forecast rate reaching a 13-year quarterly high of
3.8% in the last quarter (Q4) of this year.

Improved Economic Performance, Inflationary Threat
--------------------------------------------- -----

3. All economic indicators in H1 showed improvement in Taiwan's
economic performance. Growth in export orders accelerated to a
double-digit rate in H1 from a single-digit level in Q4 of last
year. Imports of capital goods in the second quarter (Q2) shifted
to growth, signaling an increase in domestic investment. Approved
foreign direct investment in Q2 also shifted to growth, while
manufacturing production reported accelerated growth. Prices
remained stable in H1, but increases in imported grain and crude oil
prices will become an inflationary threat. In response, the Central
Bank of China (Taiwan) (CBT) raised its benchmark rates and
increased required reserves for some deposits in June. The CBT has
also increased its open market operations in an attempt to sop up
excess liquidity.

Penalty on UMC for Investment in China Overruled
--------------------------------------------- ---

4. The Taiwan Administrative High Court (TAHC) overruled a fine of
NT$5 million (US$151,510) imposed by the Ministry of Economic
Affairs (MOEA) on United Microelectronics Company (UMC) for its
unregistered investment in He Jian Technology in China. The TAHC
said that the MOEA did not have sufficient evidence for UMC's 2001
investment in He Jian. The MOEA will appeal.

Medical Tourism
---------------

5. Taiwan announced it will allow entry of mainland Chinese for
medical treatment, beginning August 1, 2007. Treatment may be in
any of the medical specialties in which Taiwan offers world-class
care: liver transplants, facial surgery, heart surgery, artificial
insemination and joint replacement surgery. The newly-approved

TAIPEI 00001697 002 OF 003


measures would both circumvent the apparently stalled tourism talks
with China and be a money-maker for Taiwan's medical industry.
Estimates are the ambitious plan could attract as many as 100,000
customers, generate NT$7 billion (US$212 million) in 3 years, and
create 3,500 jobs in Taiwan.

Fubon Intends to Acquire PRC Bank
---------------------------------

6. Taiwan's Fubon Financial Holdings (FFH), the third-largest
financial holding Company in Taiwan, intends to acquire 20% the
PRC's Xiamen City Commercial Bank (XCCB) through its Hong Kong
subsidiary Fubon Bank (Hong Kong). FFH will cooperate with its
strategic partners to control 51% ownership and ultimately
participate in the operation of XCCB. Senior FFH executives have
discussed the project with Taiwan's Financial Supervisory Commission
(FSC) although Fubon has not yet submitted a formal application for
regulatory approval, however.

Taiwan Ranks Sixth in World IT competitiveness
--------------------------------------------- -

7. The Economist Intelligence Unit (EIU) recently gave Taiwan a
world ranking of sixth in terms of information technology (IT)
competitiveness, behind the United States, Japan, South Korea, the
United Kingdom and Australia. Taiwan's ranking was ahead of Hong
Kong's 21st and China's 64th among the 64 rated economies. The
rating was the first of its kind issued by the EIU. In an interview
with Taiwan's Central News Agency, EIU Chief Researcher Macquarie
said that Taiwan's strengths are in hardware, semiconductors, and
personal computers, all of which are at a world-class standard. He
noted that Taiwan still has room for further development in the
areas of software and technology services, however.

Taiwan DRAM Manufacturers Top World Market
------------------------------------------

8. In 2006, Taiwan DRAM (dynamic random access memory)
manufacturers took a 37% global market share, and are expected to
increase their share in 2007. DRAMeXchange, a market intelligence
group, reports that Taiwan companies comprise nine of the top 20
memory manufacturers in the world. On average, one of every three
computers worldwide uses DRAMs made by Taiwan companies. A-Data
Technology, which ranks at the top of Taiwan's DRAM industry, is the
second-largest memory module vendor in the world. Transcend, number
four in the world and specializing in flash memory, is projected to
replace A-Data as Taiwan's largest memory vendor, as the flash
memory market is likely to overtake the DRAM market. Acer ranks
sixth in the world, and its own brand Apacer has seen strong sales
for server memory.

Bayer Acquires Taiwan Resins and Films Producer
--------------------------------------------- -

9. Bayer, a German pharmaceuticals company, recently completed its
acquisition of Ure-Tech Group, the Asia-Pacific region's largest
producer of thermoplastic polyurethanes (TPU). This acquisition,
Bayer's first investment in Taiwan over the past ten years, will
make Bayer the world's largest supplier of TPU resins and films.
With the addition of Ure-Tech's facilities, Bayer Material Science
will have a total of eight TPU resin and film plants, with one each
in Taiwan, China, India, and Japan. The remaining four are in the
United States and Germany.

Double Taxation in EPZs Removed
-------------------------------------


TAIPEI 00001697 003 OF 003


10. In July, the Ministry of Finance (MOF) revised its regulations
to eliminate double taxation on companies moving goods between two
Taiwan locations, i.e., into and out of Export Processing Zones
(EPZs). The revised regulations exempt customs duties for
"non-bonded goods" moving from EPZs to tax zones. Non-bonded goods
entering tax zones will only be subject to a 5% business transaction
tax. The revised regulations will also apply to bonded factories
and manufacturing firms located in science industrial parks. The
double taxation issue arose in April when Taiwan relaxed
restrictions to allow manufacturing firms in the tax-free EPZs to
produce non-bonded goods which were, therefore, subject to customs
duties twice, i.e., on both entering and leaving EPZs.

Science Park to Allow Industry Services
---------------------------------------

11. The Executive Yuan has submitted planned amendments to the
"Management Statute for the Establishment of Science Parks" to the
Legislative Yuan (LY) for review. The bill is designed to build a
comprehensive business community within science industrial parks
where industry services can be offered and unused factories can be
rebuilt through title transfers, without resorting to forced sales.
(Note: Land in science industrial parks is owned by the government.
End Note.) The bill would allow companies serving industries to
enter science industrial parks, including R&D organizations,
incubation centers, banks, guesthouses, and conference centers.
Land occupied by these service firms is subject to a ceiling of 5%
of the park's total area. The legislation will encourage transfer
of unused rent-free factories for a maximum of six months so the
buyer can engage in construction, renovation and/or installation of
new equipment.

YOUNG

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