Cablegate: Taipei Economic Brief for November 2006

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RR RUEHGH
DE RUEHIN #4004/01 3340903
ZNR UUUUU ZZH
R 300903Z NOV 06
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC 3248
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUCPDOC/USDOC WASHDC
RUEHBK/AMEMBASSY BANGKOK 3499
RUEHBJ/AMEMBASSY BEIJING 6014
RUEHUL/AMEMBASSY SEOUL 8295
RUEHGP/AMEMBASSY SINGAPORE 6706
RUEHKO/AMEMBASSY TOKYO 8264
RUEHML/AMEMBASSY MANILA 9858
RUEHJA/AMEMBASSY JAKARTA 3958
RUEHKL/AMEMBASSY KUALA LUMPUR 3607
RUEHHI/AMEMBASSY HANOI 3173
RUEHBY/AMEMBASSY CANBERRA 4386
RUEHWL/AMEMBASSY WELLINGTON 1634
RUEHHK/AMCONSUL HONG KONG 7240
RUEHGH/AMCONSUL SHANGHAI 0587
RUEHGZ/AMCONSUL GUANGZHOU 9770

UNCLAS SECTION 01 OF 02 TAIPEI 004004

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SIPDIS

STATE PLEASE PASS USTR
STATE FOR EAP/RSP/TC, EAP/EP
USTR FOR ALTBACH and Stratford
USDOC FOR 3132/USFCS/OIO/EAP/WZARIT
TREASURY FOR OASIA/LMOGHTADER
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GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN

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

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

--Domestic Demand to Sustain 2007 Growth;
--Foreign Direct Investment Quadruples;
--Carlyle to Acquire World's Largest Chip Packaging Firm;
--Long-term Goals and Medium-term Development Plan;
--Overseas Taiwan Firms Encouraged to Invest in Taiwan;
--Efforts to Make Taiwan a High Tech Society;
--Taiwan Pushing for Tax Agreement with US.

Domestic Demand to Sustain Taiwan's 2007 Growth
--------------------------------------------- --

2. In late November 2007, the Directorate General of Budget
Accounting and Statistics (DGBAS) raised Taiwan's estimated 2006
economic growth to 4.39% from 4.14%, mainly due to export
performance. DGBAS and major private think tanks anticipate
Taiwan's 2007 growth will remain above 4%. The source of 2007
growth is projected to shift from external to internal as export
growth slows from 12.5% in 2006 to 6.1% in 2007. DGBAS expects
private investment growth in 2007 will accelerate to 1.89% from
0.15% in 2006. Meanwhile, private consumption growth will rise from
1.5% to 3.0% as credit/cash card debt problems began to disappear in
Q3 this year.

Foreign Direct Investment Quadruples
------------------------------------

3. Inbound foreign direct investment (FDI) January-October 2006
totaled US$11.23 billion, a 291 percent year-on-year increase. One
factor was Philips Electronics Industries (Taiwan) transferring its
holdings in Taiwan Semiconductor Manufacturing Company (TSMC) in
January 2006 to Royal Philips Electronics of the Netherlands. This
deal totaled US$3.8 billion which accounted for one-third of total
FDI approved in the first ten months this year. Approved FDI
without the Philips ownership transfer still registered a growth of
137.6% in January and 160% over the first ten months of the year.
Other new projects principally included GE Consumer Finance's
acquisition of Cosmos Bank, New Bridge's and Nomura's acquisition of
equity in Taishin Financial Holdings, Carlyle Group's acquisition of
Eastern Technology and Eastern TV, and Standard Chartered Bank's
merger with Hsinchu International Bank.

Carlyle to Acquire ASE
----------------------

4. On November 26, Carlyle Group, a U.S. private equity fund,
announced plans to acquire Advanced Semiconductor Engineering (ASE),
the world's largest chip packaging firm, by buying ASE shares on the
Taiwan Stock Exchange (TSE). After acquiring majority equity,
Carlyle will de-list ASE from TSE. Carlyle is one of the foreign
investors attracted by future growth opportunities, low share
prices, and abundant inexpensive funding capital that Taiwan started
earlier this year permitting foreign investors to use as a source of
foreign direct investment. Taiwan's interest rates are the lowest
in Asia after only Japan.

Long-term Goals and Medium-term Development Plan
--------------------------------------------- ---

5. Taiwan recently set ten-year economic goals and a first phase
three-year industrial development plan. Over the next ten years,
Taiwan's per capita GDP will double, up from an estimated US$15,690
in 2006 to US$30,000 in 2015. Average annual economic growth will
be 5%. The unemployment rate will be below 4%, and the inflation
rate will be below 2%. Taiwan anticipates the service sector will
grow by an average annual rate of 5.5%, faster than a projected rate

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of 1% for agriculture and a projected rate of 4.3% for the
industrial sector.

6. To achieve the long-term goals, Taiwan has adopted a three-year
development program under which the authorities will substantially
discount rent of industrial land, relax restrictions on employment
of foreign workers, and provide small and medium enterprises funding
assistance. Industries targeted for growth over the next three
years include banking, securities and insurance, logistic and
distribution, medical care, digital content, tourism,
telecommunications, information technology, and other services; and
semiconductor, LCD-panel, petrochemicals, iron and steel, and
machinery in the industrial sector.

Overseas Taiwan Firms Encouraged to Invest in Taiwan
--------------------------------------------- -------

7. The Ministry of Economic Affairs (MOEA) has set up an
inter-agency task force to encourage overseas Taiwan enterprises to
invest in Taiwan. After its first meeting on November 14, the task
force published results of a survey indicating that 401 overseas
Taiwan companies want to return and invest in Taiwan. The majority
of these companies are currently operating in Southeast Asia and
China, with several in the United States. Taiwan authorities have
earmarked NT$200 billion (US$6.1 billion) in low-interest loans for
returning Taiwan companies.

Efforts to Make Taiwan Global ICT Model Society
--------------------------------------------- --

8. Vice Premier Tsai Ing-wen recently announced two programs to
make Taiwan a model society in term of information and
communications technology (ICT) applications. The M-Taiwan Plan
program initiated in 2005 is designed to increase wireless networks
and Internet usage. The plan also seeks to provide more ICT access
in remote and rural areas. Another program to be adopted in the
near future is called the U-Taiwan Plan which will utilize smart
devices to allow Internet access anyplace anytime. An aim of the
plan is to increase Taiwan's broadband penetration rate from less
than 10% in 2002 to 80% while promoting high-definition television
in households. These two plans are expected create nearly NTD 1
trillion (US$30.3 billion) of trade and investment opportunities.

Taiwan Pushing for Tax Agreement with US
----------------------------------------

9. Echoing AIT/T Director Steve Young's recent call in his November
21 speech to AmCham, Taiwan's Ministry of Finance (MOF) is promoting
tax agreements with the United States and Canada. U.S. enterprises
in Taiwan are seeking relief from taxes on royalties and commissions
earned and on corporate bonds. Tax agreements avoid double taxation
by different jurisdictions. Some Taiwan residents are worried that
such agreements will expose their overseas income to taxation by
Taiwan.

YOUNG

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