TAIWAN ECONOMIC BRIEF JULY 2005

C O N F I D E N T I A L SECTION 01 OF 02 TAIPEI 003289

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E.O. 12958: DECL: 07/08/2020
TAGS: ECON EFIN PINR PREL TW
SUBJECT: TAIWAN ECONOMIC BRIEF JULY 2005

Classified By: AIT DIRECTOR DOUGLAS PAAL, REASON 1.5 B/D


1. (U) This cable summarizes selected recent economic events
in Taiwan in May 2005:

-- Economic Growth

-- Tax Reform

-- China's Lenovo Breaks Taiwan Barrier

-- High-speed Rail

-- Boeing Delivers New Aircraft to EVA

Think Tanks Lower Economic Growth Estimated for 2005
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2. (U) The Taiwan Institute of Economic Research (TIER)
reduced Taiwan's estimated growth rate to 3.3% from the 4.4%
estimated in April. TIER attributed the downward adjustment
mainly to lower than expected export growth in the first half
of 2005. The Chunghua Institution for Economic Research
(CIER) cut its estimate of the growth rate to 3.8% from 4.1%
predicted in April. CIER blamed inventory reduction and
industry emigration. Industrial relocation contributed to a
new low for the past two years in Q2 y-o-y export growth,
declines in manufacturing production in Q1 and Q2, and low
private investment growth. Higher produce prices and higher
energy costs are building inflationary pressure, but these
are partly offset by stable prices for other goods and
services. School graduates joining the labor market drove up
the unemployment rate slightly.

Alternate Minimum Tax
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3. (U) In late July 2005, the Ministry of Finance (MOF)
ended a three-month interagency conference on the proposed
alternate minimum tax system, an important part of Taiwan's
tax reform. Despite industry calls to reduce the rate from
10% to 7.5%, the proposed minimum tax for businesses is 10%.
For individuals earning at least NT$10 million before taxes,
the proposed minimum tax is 20%. The alternate minimum tax
proposal has cause grave concern to U.S. investors that
Taiwan may renege its earlier commitment of tax incentives.


4. (C) Hong Chi-chang, a senior DPP legislator, told AIT
that President Chen told a small group of senior legislators
and officials that he would not cave to business pressure on
this. He said he would be willing to consider reducing the
alternative tax rate in LY caucus negotiations with the KMT
if necessary to pass the legislation.

Lenovo Investment Will Break Barrier on PRC Investment
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5. (U) On July 19, Mainland Affairs Council (MAC) Chairman
Joseph Wu announced that MAC had approved PRC PC manufacturer
Lenovo's plan to acquire with Taiwan's IBM PC division via
its Dutch subsidiary. Taiwan's Executive Yuan will also have
to approve the plan. This is the first case of Taiwan
government approval of Mainland investment in Taiwan. MAC
Economic Department Director Fu Don-cheng told AIT/T that the
Lenovo case would not become a model for Mainland firms to
invest in Taiwan. According to Fu, all such investment
proposals will be assessed on a case-by-case basis. However,
the fact that Taiwan is willing to consider such applications
at all marks a shift in Taiwan's posture toward PRC
investment, made easier by the cover provided by the IBM
acquisition.

Further Delays for High-Speed Rail?
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6. (U) On July 23, Japanese media reported that it is likely
that the inauguration of Taiwan's high-speed rail would be
postponed beyond the October 2005 target due to construction
delays for the electronic core systems. As of July 23, these
systems were only 60 percent complete. The Taiwan High-Speed
Rail Corporation (THSRC) denied all rumors of delay and
reconfirmed that the system would begin operations in October
as planned. Furthermore, on July 22, THSRC Assistant Vice
President Ted Chia told the Taipei Times that the company
expected to raise NT$ 5.5 billion (USD 171 million) of
capital by July 31 and an additional NT$ 2 billion (USD 63
million) by the end of September. THSRC has repeatedly had
trouble meeting its financing targets and has had to revise
its financing plan at least 11 times.
Boeing Delivers to EVA Air
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7. (U) On July 29, Taiwan's EVA Airways celebrated the
delivery of the airline's first of 15 Boeing 777-300ER
(Extended Range) aircraft. EVA Chairman Steve Lin and
President K.W. Chang presided over a ceremony attended by
Boeing Vice President for Sales Larry Dickenson and AIT/T
Economic and Commercial sections. Chairman Lin told AIT the
new plane offers significant savings in fuel costs over any
other type of plane available.
PAAL