Cablegate: Taipei Economic Brief for August 2006

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DE RUEHIN #3044/01 2490351
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R 060351Z SEP 06
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC 1944
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUCPDOC/USDOC WASHDC
RUEHBK/AMEMBASSY BANGKOK 3392
RUEHBJ/AMEMBASSY BEIJING 5619
RUEHUL/AMEMBASSY SEOUL 8066
RUEHGP/AMEMBASSY SINGAPORE 6590
RUEHKO/AMEMBASSY TOKYO 7994
RUEHML/AMEMBASSY MANILA 9789
RUEHJA/AMEMBASSY JAKARTA 3913
RUEHKL/AMEMBASSY KUALA LUMPUR 3552
RUEHHI/AMEMBASSY HANOI 3119
RUEHBY/AMEMBASSY CANBERRA 4299
RUEHWL/AMEMBASSY WELLINGTON 1547
RUEHHK/AMCONSUL HONG KONG 6826
RUEHGH/AMCONSUL SHANGHAI 0352
RUEHGZ/AMCONSUL GUANGZHOU 9530

UNCLAS SECTION 01 OF 02 TAIPEI 003044

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STATE PLEASE PASS USTR
STATE FOR EAP/RSP/TC, EAP/EP
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TREASURY FOR OASIA/LMOGHTADER
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TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF
GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN

E.O. 12958: N/A
TAGS: EINV EFIN ECON PINR TW
SUBJECT: Taipei Economic Brief for August 2006

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

--Taiwan firms in China boost economy;
--419 Microsoft Managers from PRC Attend Taipei Meeting;
--Cross-Strait tourism ready;
--Evergreen rolls out modified 747;
--TSMC sues PRC-based SMIC again;
--Foreign investment exempt from AMT;
--NTD loans designated as FDI.

Industrial Relocation to China Benefits Taiwan Economy
--------------------------------------------- --------

2. Taiwan's four major think tanks all project economic growth will
remain around 4% in 2006 and 2007. Taiwan's economy grew 4% in
2005. Export expansion, fueled by production facilities in China,
will serve as a major driving force behind Taiwan's economic growth
in 2006 and 2007. Taiwan exports to China have grown faster than
exports to other markets and have allowed Taiwan to achieve huge
trade surpluses and foreign exchange reserves. Export expansion and
development of the service sector will keep unemployment in 2006 and
2007 below four percent (except for a seasonal upward fluctuation in
summer time). Private consumption and private investment, some 75%
of GDP, will gradually recover from the adverse effects of
credit/cash card debt and excess inventory problems.

419 Microsoft Managers from PRC Attend Taipei Meeting
--------------------------------------------- --------

3. Taiwan authorities approved a group of 419 China-based Microsoft
managers to attend a 3-day meeting in Taipei beginning August 22.
The visit reflects efforts to relax restrictions on business trips
by white-collar workers from China, one of the 516 recommendations
of the Economic Sustainable Development Conference (ESDC) held in
late July. Taiwan's Ministry of Economic Affairs (MOEA) is planning
further liberalizations which it expects will facilitate development
of regional operations, international logistics, international trade
fairs, and related activities in Taiwan. At present, foreign and
local companies have set up 305 regional operations headquarters, 89
R&D centers, 12 international warehouses, and nine international
logistics centers in Taiwan.

Cross-Strait Tourist Exchanges Are Ready
----------------------------------------

4. To facilitate tourists from China, Taiwan set up the Taiwan
Cross-Strait Tourist Traveling Association (TCTTA) just ten days
after the PRC inaugurated the Cross-Strait Travel Exchange
Association (CTEA) on August 17. Taiwan's Tourist Bureau (TB) will
contribute 50% of the NT$1 million (US$30,770) initial funding. TB
Director General (DG) Hsu Wen-sheng was elected as TCTTA Chairman,
and Deputy DG Lai Seh-jen was appointed as Executive Secretary. Lai
will lead Taiwan's delegation in cross-Strait tourist exchange
consultations expected to start soon. Once China permits its
nationals to travel to Taiwan, Taiwan monetary authorities will
allow currency exchange between the NTD and the RMB at designated
places near harbors, airports, and sightseeing spots.

Boeing & Evergreen Roll out Modified 747 Freighter
--------------------------------------------- -----

5. Under a Boeing contract, Evergreen Aviation Technologies
Corporation (EGAT) rolled out the first of three 747-400 Large Cargo
Freighters (LCF) on August 28. The LCF is a 747 specially modified
by EGAT to dramatically expand the cargo space to carry the fuselage
and wings of Boeing's 787 Dreamliner for final assembly. Boeing and

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EGAT are both pleased by progress so far. The U.S. Federal Aviation
Administration has worked closely with the firms to accelerate the
certification process for this unusual aircraft. The LCF should
begin operations in January 2007. They will be operated exclusively
for Boeing's Dreamliner project by Evergreen International Airlines,
Evergreen Group's Oregon-based cargo carrier.

TSMC Sues SMIC Again

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6. Taiwan Semiconductor Manufacturing Company (TSMC), the world's
largest contract chip maker, announced on August 28 that it was
again filing suit against Semiconductor Manufacturing International
Corporation (SMIC) of China in a California court. SMIC is TSMC's
main rival in the PRC and was founded by Richard Chang, a former
TSMC employee. TSMC believes SMIC violated a 2005 settlement and

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continues to use TSMC trade secrets. TSMC had originally filed suit
against SMIC in 2003 for patent violations. They reached a
settlement in 2005 under which SMIC agreed to pay TSMC US$175
million.

Taiwan Exempts Foreign Portfolio Investment from 10% AMT
--------------------------------------------- --------

7. In mid-August, Taiwan's Ministry of Finance (MOF) issued an
administrative order to exempt foreign institutional investors
(FIIs) from the 10% alternative minimum tax (AMT) if the investment
capital comes from offshore and is not the FII's own funds. The MOF
order will be retroactive to January 1, 2006 when the AMT was
implemented. An MOF official estimated that the order will exempt
99% of foreign portfolio investment in Taiwan from the AMT.
However, FIIs with fixed offices or agents in Taiwan must pay the
AMT for securities trading done for its own account.

NTD Loans Considered Foreign Direct Investment
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8. U.S. investment companies could benefit from Taiwan's decision
to permit secured NT dollar (NTD) bank loans to be designated as
foreign direct investment (FDI). Taiwan's Foreign Investment
Commission (FIC) has expanded the permissible sources of FDI to
include secured NTD loans provided by Taiwan banks from foreign
currency remitted into Taiwan. The foreign investors must be
multinational corporations or actually engaged in business
activities. "Paper companies" registered with such tax havens as
the British Virgin Islands may not enjoy the privilege. However,
the Financial Supervisory Commission is concerned that Taiwan
companies, particularly banks and other financial institutions, may
be vulnerable to hostile takeovers if foreign investors can use
local capital obtained from local banks. The move is intended to
help absorb excess liquidity in Taiwan's economy.

YOUNG

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