Cablegate: Taipei Economic Brief for July

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DE RUEHIN #2574/01 2130847
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FM AIT TAIPEI
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INFO RUCPDOC/USDOC WASHDC
RUEHBK/AMEMBASSY BANGKOK 3354
RUEHBJ/AMEMBASSY BEIJING 5502
RUEHUL/AMEMBASSY SEOUL 7982
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RUEHML/AMEMBASSY MANILA 9769
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RUEHKL/AMEMBASSY KUALA LUMPUR 3538
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RUEHGH/AMCONSUL SHANGHAI 0285
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UNCLAS SECTION 01 OF 03 TAIPEI 002574

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E.O. 12958: N/A
TAGS: EINV EFIN ECON PINR TW
SUBJECT: Taipei Economic Brief for July

1. This cable summarizes selected recent economic events in Taiwan
in July 2006:

--Economic Conference offers 516 recommendations;
--Economy expected to slow in H2;
--Taiwan to streamline insurance policy review;
--Restriction on foreign professionals relaxed;
--TSMC vaults to 4th largest semiconductor firm;
--South Korea may surpass Taiwan in IT production;
--MOF completes investigation on PRC towel dumping;
--First Taiwan hospital in Mainland China;
--Taiwan firms are PRC's major FX earners.

SEDC Ended with 516 Recommendations
-----------------------------------

2. Over 100 economic, financial, business, and political
representatives attended the Sustainable Economic Development
Conference (SEDC) organized by the Executive Yuan (EY) on July 27
and 28. The meeting ended with 516 recommendations including a
consensus on greenhouse gas reduction, the need for legislation of
an energy tax, agreement to promote a national pension system, and
endorsement of a stock market international board. Premier Su
Tseng-chang promised that the EY will work out concrete

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implementation plans for these recommendations within one month.
The opposition People First Party and Kuomintang (KMT) Party
boycotted the meeting. The Taiwan Solidarity Union (TSU) Party
withdrew from the conference after relaxation of the 40% of capital
limit on investment in Mainland China was added as a
recommendation.

Taiwan's Economy Doing Well in H1 but Slows in H2
--------------------------------------------- ----

3. Exports boosted Taiwan's economy in the first half (H1) of 2006,
while sluggish domestic demand was a negative factor. Higher
interest rates in the United States have not dampened demand for
products supplied by Taiwan firms. Export orders received by Taiwan
grew 15% in Q2 of 2005 and nearly 22% in Q2 of 2006. Export growth
accelerated from 5.8% to 14%. However, higher petroleum costs and
domestic factors dampened private consumption to barely 2% in H1.
Worse, private investment in H1 of 2006 declined 0.5% from a year
ago.

4. Three major think tanks (Taiwan Institute of Economic Research
(TIER), Chunghua Institution for Economic Research (CIER), and
Academia Sinica) all predict Taiwan's economy will slow in H2 of
2006 to achieve around 4% growth for the year. Higher interest
rates, higher petroleum prices, and an increased tension in the
Middle East will weaken foreign demand and reduce Taiwan's export
growth to a single digit rate in H2 of this year. Sluggish domestic
demand is expected to continue in H2 as consumer confidence has been
hurt by attempts to recall President Chen Shui-bian in June,
scandals surrounding Taiwan's First Family, and increased tension in
the Middle East. TIER and Academia Sinica predicted quarterly
economic growth will decline from 4.9% in Q1 to 3.1% in Q4.

Taiwan to Streamline Insurance Policy Review
--------------------------------------------

5. On July 11, Taiwan's Financial Supervisory Commission Insurance
Bureau (IB) announced it will streamline insurance policy reviews
beginning September 1 in response to recommendations from AmCham and
local insurance companies. Insurance firms will not be required to

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obtain prior permission for most new insurance products. These
measures will reduce the number of insurance policies requiring
prior permission by 75% and cut the review time by more than half.
In addition, the IB will provide six months of "innovation
protection" that requires imitations of another company's new types
of insurance products to seek prior IB permission. These changes
should increase the efficiency and profitability of insurance
companies, but require companies to exercise strict internal
controls.

Relaxed Restrictions on Foreign Professionals
---------------------------------------------

6. On July 26, the Financial Supervisory Commission announced it
will allow certified public accountant (CPA) offices to hire foreign
students as paid short-term interns. The Ministry of Justice is
revising rules to allow law firms to set up similar programs which
may be adopted in August. The Council for Economic Planning and
Development is also coordinating with the Ministry of the Interior
and the Public Construction Commission to permit foreign students as
paid short-term interns in architecture and engineering firms. In
May, Taiwan began to allow banks, insurance companies, securities
firms, and large enterprises to set up intern programs for foreign
students.

TSMC Vaults to 4th Largest Semiconductor Firm

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7. Taiwan Semiconductor Manufacturing Company (TSMC) was the
world's fourth largest semiconductor firm in the first half of 2006
by total revenue according to new rankings released by IC Insights
Inc., a market research firm. TSMC rose from the eighth position in
2005. It now trails only Intel, Samsung, and Texas Instruments.
TSMC is the world's largest contract chip manufacturer. It

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pioneered the "foundry-fabless" model where "foundries" manufacture
chips under contract for "fabless" integrated circuit design houses.
Qualcomm's entry into the top 15 gave further evidence of the
success of the foundry-fabless model.

South Korea's IT Industry to Surpass Taiwan's?
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8. The Market Intelligence Center (MIC) of the Institute for
Information Industry (III) recently predicted that in 2010, South
Korea may replace Taiwan as the third largest supplier of
information and telecommunications (IT) products in the world, after
the United States and Japan. MIC estimates the production value of
South Korea's IT industry in 2010 will total USD 294.7 billion,
higher than Taiwan's USD 283.1 billion. Chairman Chen Ching-wen of
Topology Research Institute, who used to be MIC Director, indicated
that there are many Taiwan IT firms too small to be competitive.
According to Chen, Taiwan authorities have spread resources into too
many different industries which can not all compete in international
markets. Both Chen and President Lee Yuan-tseh of the Academia
Sinica have suggested Taiwan authorities concentrate efforts and
resources on a few projects with the greatest potential.

MOF Proposes Anti-dumping Taxes on PRC-made Towels
--------------------------------------------- -----

9. On July 24, based on its investigation in China and responses to
questionnaires by China-based towel manufacturers, Taiwan's Ministry
of Finance (MOF) found that PRC-made towels have been dumped in
Taiwan at below market prices. The MOF has come up with dumping

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margins for individual towel manufacturers in China, i.e., 88.5% for
Shanming Enterprise, 86.6% for Twin-Lantern Home Textile, and 204.1%
for all other towel exporters to Taiwan. The MOF will submit its
investigation report and recommendations to the Ministry of Economic
Affairs (MOEA) on August 3. The MOEA is required by Taiwan laws to
make a final determination whether the PRC's dumping has injured
Taiwan's towel industry within 40 days after it received the MOF's
investigation report.

The First Taiwan-built Hospital in China
----------------------------------------

10. Taiwan investors have started investing in medical institutions
in China. The first hospital built by a Taiwan company recently
began operation. The success of the project lay in its agreement to
a joint venture with local interests that effectively removed
opposition from local medical health institutions. To win
confidence, the Taiwan company obtained insurance from the province
and city. Germany's Siemens helped plan the medical instrument
system of the hospital. Since Beijing announced policies to
encourage Taiwan investment in China early this year, Taiwan's
medical industry has aggressively explored business opportunities in
Mainland China. Taiwan company Lien Shin is building a 600-bed
hospital in Shanghai which is scheduled to start operation in 2007.
Taiwan company Chang Keng is constructing a 2000-bed hospital in
Xiamen which will also go into operation next year.

Taiwan Firm Top Foreign Exchange Earner in China
--------------------------------------------- --

11. The PRC's Ministry of Commerce has ranked Hon Fu Jin Precision,
a subsidiary Taiwan's Hon Hai Precision, as China's largest foreign
exchange earner in 2005. Hon Fu Jin reported USD 14.47 billion of
export sales, surpassing such multinationals as Motorola, Nokia, and
Samsung. In fact, four of the PRC's top 10 foreign trade companies
in 2005 were from Taiwan. In terms of two-way trade (exports plus
imports), the PRC's state-owned China Petroleum and Chemical
Corporation ranked top with USD 34.3 billion. Hon Fu Jin ranked
second with USD 27.17 billion, followed by Taiwan's Quanta
(Shanghai) in third place with USD 16.77 billion and Taiwan's
Asustek Computer (Suzhou) in sixth place. The number of
Taiwan-invested enterprises in China has already reached 70,000.
Among them, 37 infotech companies were listed among China's top 200
exporters in 2005, with export sales equal to 9.4% of China's total
exports.

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