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Cablegate: Taipei Economic Brief for September 2007

VZCZCXRO7443
RR RUEHGH
DE RUEHIN #2289/01 2780622
ZNR UUUUU ZZH
R 050622Z OCT 07
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC 7072
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUCPDOC/USDOC WASHDC
RUEHBK/AMEMBASSY BANGKOK 3833
RUEHBJ/AMEMBASSY BEIJING 7327
RUEHUL/AMEMBASSY SEOUL 8939
RUEHGP/AMEMBASSY SINGAPORE 7020
RUEHKO/AMEMBASSY TOKYO 9127
RUEHML/AMEMBASSY MANILA 0157
RUEHJA/AMEMBASSY JAKARTA 4132
RUEHKL/AMEMBASSY KUALA LUMPUR 3816
RUEHHI/AMEMBASSY HANOI 3391
RUEHBY/AMEMBASSY CANBERRA 4606
RUEHWL/AMEMBASSY WELLINGTON 1875
RUEHHK/AMCONSUL HONG KONG 8607
RUEHGH/AMCONSUL SHANGHAI 1394
RUEHGZ/AMCONSUL GUANGZHOU 0580

UNCLAS SECTION 01 OF 03 TAIPEI 002289

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 PINR TW
SUBJECT: Taipei Economic Brief for September 2007

1. Summary. This cable summarizes selected September 2007 economic
events in Taiwan. Economic statistics show better than expected
performance and potential job growth....Biggest share of next year's
government budget goes to defense and deficit expected to shrink
significantly....The Central Bank hikes interest rates in the face
of building inflation pressures....Taiwan attracts investment from
Taiwan businesses overseas and a major Japanese glass
manufacturer....Penghu Islands included in the mini three links,
sort of....Taiwan world's top producer of many high-tech
products....Big plans for generating wind power offshore....TSMC
gets inside XBOX....And, finally, new rules for calculating bank
deposit insurance premiums. END SUMMARY.

Unexpectedly Strong Economic Performance
----------------------------------------
2. Taiwan's unexpectedly strong economic performance in July and
August will likely prompt economic think tanks to further raise the
island's 2007 real GDP growth estimates to 4.5-5.0%. In these two
months, Taiwan's trade surplus registered year-on-year growth of
24%, a sharp contrast to the decline predicted for the third quarter
(Q3) by economists. Taiwan's year-on-year export growth accelerated
to 9.3% in July-August and is expected to rise in Q4. A 20%
increase in export orders in July-August will translate into
increased production later this year. To meet stronger foreign
demand, industrial production during these two months posted
year-on-year growth of 12%, a new high over the past three years.
Foreign direct investment in Taiwan approved in July-August nearly
tripled, compared with the same period last year. The unemployment
rate stayed at 3.9%.

Employment Increase Forecast
----------------------------
3. Taiwan's employment in Q4 is expected to report a net increase
of 24,000, including 16,000 manufacturing jobs, according to a
survey conducted by the Council of Labor Affairs. Electronics
firms, the backbone of Taiwan's industrial sector, will expand their
workforces to meet growing delivery requirements in Q4. Meanwhile,
labor demand by construction firms is expected to decrease as
several construction projects will be concluded later this year.
Entertainment ventures, hotels, and restaurants will also see a
decline in labor demand from September with the end of the summer
holiday.

Central Bank Raises Interest Rates
----------------------------------
4. While the U.S. Federal Reserve Board cut its benchmark rate by
0.5 percentage points earlier this month, the Central Bank of China
(Taiwan) (CBT) raised interest rates by 0.125 percentage points on
September 20. This reduced the interest rate gap between the United
States (3.95% for one-year deposits) and Taiwan (2.465%) to 1.485
percentage points, the narrowest for the past two years. With
higher interest rates, the CBT wants to preempt inflationary
pressure, due in part to higher prices for imports of crude oil,
grains, and other materials and to recent price rises of vegetables
and fruits damaged by typhoons. The consumer price index in August
rose 1.6%, up from 1% in Q1 and 0.3% in Q2.

2008 Central Budget Proposal
----------------------------
5. In early September, Taiwan's Executive Yuan submitted the 2008
central budget proposal to the Legislative Yuan for consideration.
The budget deficit in 2008 is expected to drop by 30% as planned
revenue will grow faster than planned expenditure. For the first
time in eight years, defense spending, at 20% of the budget, will
surpass education and social welfare to account for the largest
share of the budget. With a smaller deficit, Taiwan's outstanding
public debt as a percentage of GDP is expected to decline to a

TAIPEI 00002289 002 OF 003


five-year-low of 30% in 2008.

Asahi Glass to Build Two Glass Furnaces
---------------------------------------
6. Asahi Glass of Japan will build two glass substrate furnaces in
the Southern Taiwan Science Park in Tainan, at a projected cost of
NT$10 billion (US$303 million). The project, together with glass
cutting and grinding facilities currently under construction, will
sharpen Asahi's competitive edge among substrate glass suppliers to
Taiwan's flat panel manufacturers (in particular Tainan-based Chi
Mei Optoelectronics).

Attracting "Taishang" back to Taiwan
------------------------------------
7. In February 2005, the Ministry of Economic Affairs (MOEA)
adopted a program to attract new investment from Taiwan firms that
have some or all of their operations overseas. Since then, 86
projects have been identified by overseas Taiwan firms, with a total
investment of NT$7.8 billion (US$236 million). Of the 86 projects,
12 have already been completed, 36 are underway, and the remaining
38 are still in the planning stages. The 86 investors include 34
from China (mainly traditional manufacturing industries such as
electronic and electrical appliances and machinery), 12 from
Southeast Asia (mainly textiles, construction, and wood furniture),
35 from North America (mainly biotechnology and IT), and five from
New Zealand, Germany, Japan, and Africa (mainly IT, chemicals, and
organic produce).

Penghu Tacked on to Mini-Links
------------------------------
8. On April 1, 2007, Taiwan approved the expansion of the
mini-links to include the Penghu Islands, which sit in the middle of
the Taiwan Straits. This means that Penghu residents can now use
the existing ferry service via Kinmen and Matsu to travel to Fujian;
Fujian residents can use the mini-links to cross over to Kinmen and
Matsu and continue on to Penghu. Fujian tourists to Penghu,
however, are subject to a daily quota of 640. On April 19, Penghu
Magistrate Wang Ch'ien-fa led the first tourist group to Fujian.
The first two tourist groups from Fujian to Penghu departed on 9/28
and another on October 2.

Much Has Changed in 24 Years
----------------------------
9. Taiwan's high-tech strengths are reflected in the list of
products that it leads the world in producing. According to the
Council for Economic Planning and Development, these products are
(with world market shares in parentheses): Foundry OEM Chips
(66.7%), IC packaging (47.8%), IC testing (60.3%), MASK ROM (91.4%),
TN/STN-LCD panels (75.2%), TFT-LCD panels (45.7%), electrolytic
copper foil (78.7%), CD-ROM (57%), ABS resin (20%), and electric
mobility scooters and electric wheelchairs (45%). This is a
remarkable change from what the list looked like in 1983, when
Taiwan was the world's largest supplier of shoes, electric fans,
bicycles, bicycle tires, brakes, and chains, umbrellas, sewing
machines, thermos bottles, monosodium glutamate, and camphor.

Offshore Wind Turbine Program
-----------------------------
10. In early September, the Ministry of Economic Affairs (MOEA)
implemented the First Stage of the Offshore Wind Turbine Development
Program. The program calls for wind turbines to be built in six
different areas in waters off Taiwan's west coast and Penghu. The
first offshore wind turbine is scheduled to begin operation in 2013.
These turbines will eventually provide power generation capacity of
300,000 kilowatts. Investment required by the program is estimated
at NT$40 billion (US$1.2 billion). At present, Taiwan has 127
inland wind turbines whose combined installed capacity is 217,200

TAIPEI 00002289 003 OF 003


kilowatts. The MOEA expects that by 2010, Taiwan's wind power
capacity will reach 1.2 million kilowatts, with a yearly generation
of 3.3 billion kilowatt-hours. This is sufficient to meet the power
demand of 825,000 households.

TSMC Receives Xbox Orders

SIPDIS
-------------------------
11. Taiwan Semiconductor Manufacturing Corp (TSMC) announced in
mid-August that Microsoft has started production of its Xbox game
consoles using TSMC's 90 nanometer embedded DRAM process. Taiwan's
downstream integrated circuits (IC) manufacturers, including
Advanced Semiconductor Engineering (ASE), Silicon Precision
Industries Co. Limited (SPIL), and King Yuan Electronics Corp
(KYEC), will benefit from Xbox production by serving as a part of
the Xbox supply chain. As a result, Taiwan's consumer electronics
exports in Q3 are estimated to grow by 10% over Q2.

Change in Bank Deposit Insurance Premiums
-----------------------------------------
12. The Central Deposit Insurance Corporation (CDIC), which insures
bank deposits and is modeled after the FDIC in the U.S., has
announced new rates for deposit insurance premiums and has changed
the basis on which they are calculated. These changes are
retroactive to July 1. Prior to the change, premiums were assessed
only on insured deposits. Now the premiums are assessed on total
deposits. In response to complaints from banks, the CDIC reduced
most premium rates, especially for banking institutions with the
healthiest balance sheets. According to the Banking Bureau, there
will be virtually no cost impact on local banks; because of a
different deposit mix, foreign banks will see their premiums
increase by 2% on average.

YOUNG

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