Taipei Economic Brief for July 2007

UNCLAS SECTION 01 OF 03 TAIPEI 001697 SIPDIS SIPDIS STATE PLEASE PASS USTR STATE FOR EAP/RSP/TC, EAP/EP USTR FOR ALTBACH AND STRATFORD USDOC FOR 3132/USFCS/OIO/EAP TREASURY FOR OASIA/TTYANG 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 July 2007 ¶1. This cable summarizes selected July 2007 economic events in Taiwan: --Standard Chartered Raises Taiwan's GDP Growth --Improved Economic Performance, Inflationary Threat --Penalty on UMC for Investment in China Overruled --Medical Tourism --Fubon Intends to Acquire PRC Bank --Taiwan Ranks Sixth in World IT competitiveness --Taiwan DRAM Manufacturers Top World Market --Bayer Acquires Taiwan Resins and Films Producer --Double Taxation in EPZs Removed --Science Park to Allow Industry Services Standard Chartered Raises Taiwan's GDP Growth -------------- ¶2. Standard Chartered (Taiwan) raised its 2007 real GDP growth forecast for Taiwan from 4.1% to 4.5%, attributing the rise mainly to accelerated private consumption growth. Expansion of private consumption, stimulated partly by a rise in stock prices and partly by resolution of credit/cash card debt problems, also prompted the Taiwan Institute of Economic Research (TIER) to increase Taiwan's estimated growth to 4.21% from April's 4.09% projection. Goldman Sachs is more optimistic than other forecasters, projecting the growth rate will further rise from 4.5% in 2007 to 5.5% in 2008. All of these groups anticipate that increases in the prices of imported grain and crude oil will drive up inflation from below one percent in the first half (H1) of this year to over two percent in H2, with TIER's forecast rate reaching a 13-year quarterly high of 3.8% in the last quarter (Q4) of this year. Improved Economic Performance, Inflationary Threat -------------- -------------- ¶3. All economic indicators in H1 showed improvement in Taiwan's economic performance. Growth in export orders accelerated to a double-digit rate in H1 from a single-digit level in Q4 of last year. Imports of capital goods in the second quarter (Q2) shifted to growth, signaling an increase in domestic investment. Approved foreign direct investment in Q2 also shifted to growth, while manufacturing production reported accelerated growth. Prices remained stable in H1, but increases in imported grain and crude oil prices will become an inflationary threat. In response, the Central Bank of China (Taiwan) (CBT) raised its benchmark rates and increased required reserves for some deposits in June. The CBT has also increased its open market operations in an attempt to sop up excess liquidity. Penalty on UMC for Investment in China Overruled -------------- --- ¶4. The Taiwan Administrative High Court (TAHC) overruled a fine of NT$5 million (US$151,510) imposed by the Ministry of Economic Affairs (MOEA) on United Microelectronics Company (UMC) for its unregistered investment in He Jian Technology in China. The TAHC said that the MOEA did not have sufficient evidence for UMC's 2001 investment in He Jian. The MOEA will appeal. Medical Tourism -------------- ¶5. Taiwan announced it will allow entry of mainland Chinese for medical treatment, beginning August 1, 2007. Treatment may be in any of the medical specialties in which Taiwan offers world-class care: liver transplants, facial surgery, heart surgery, artificial insemination and joint replacement surgery. The newly-approved TAIPEI 00001697 002 OF 003 measures would both circumvent the apparently stalled tourism talks with China and be a money-maker for Taiwan's medical industry. Estimates are the ambitious plan could attract as many as 100,000 customers, generate NT$7 billion (US$212 million) in 3 years, and create 3,500 jobs in Taiwan. Fubon Intends to Acquire PRC Bank -------------- ¶6. Taiwan's Fubon Financial Holdings (FFH),the third-largest financial holding Company in Taiwan, intends to acquire 20% the PRC's Xiamen City Commercial Bank (XCCB) through its Hong Kong subsidiary Fubon Bank (Hong Kong). FFH will cooperate with its strategic partners to control 51% ownership and ultimately participate in the operation of XCCB. Senior FFH executives have discussed the project with Taiwan's Financial Supervisory Commission (FSC) although Fubon has not yet submitted a formal application for regulatory approval, however. Taiwan Ranks Sixth in World IT competitiveness -------------- - ¶7. The Economist Intelligence Unit (EIU) recently gave Taiwan a world ranking of sixth in terms of information technology (IT) competitiveness, behind the United States, Japan, South Korea, the United Kingdom and Australia. Taiwan's ranking was ahead of Hong Kong's 21st and China's 64th among the 64 rated economies. The rating was the first of its kind issued by the EIU. In an interview with Taiwan's Central News Agency, EIU Chief Researcher Macquarie said that Taiwan's strengths are in hardware, semiconductors, and personal computers, all of which are at a world-class standard. He noted that Taiwan still has room for further development in the areas of software and technology services, however. Taiwan DRAM Manufacturers Top World Market -------------- ¶8. In 2006, Taiwan DRAM (dynamic random access memory) manufacturers took a 37% global market share, and are expected to increase their share in 2007. DRAMeXchange, a market intelligence group, reports that Taiwan companies comprise nine of the top 20 memory manufacturers in the world. On average, one of every three computers worldwide uses DRAMs made by Taiwan companies. A-Data Technology, which ranks at the top of Taiwan's DRAM industry, is the second-largest memory module vendor in the world. Transcend, number four in the world and specializing in flash memory, is projected to replace A-Data as Taiwan's largest memory vendor, as the flash memory market is likely to overtake the DRAM market. Acer ranks sixth in the world, and its own brand Apacer has seen strong sales for server memory. Bayer Acquires Taiwan Resins and Films Producer -------------- - ¶9. Bayer, a German pharmaceuticals company, recently completed its acquisition of Ure-Tech Group, the Asia-Pacific region's largest producer of thermoplastic polyurethanes (TPU). This acquisition, Bayer's first investment in Taiwan over the past ten years, will make Bayer the world's largest supplier of TPU resins and films. With the addition of Ure-Tech's facilities, Bayer Material Science will have a total of eight TPU resin and film plants, with one each in Taiwan, China, India, and Japan. The remaining four are in the United States and Germany. Double Taxation in EPZs Removed -------------- TAIPEI 00001697 003 OF 003 ¶10. In July, the Ministry of Finance (MOF) revised its regulations to eliminate double taxation on companies moving goods between two Taiwan locations, i.e., into and out of Export Processing Zones (EPZs). The revised regulations exempt customs duties for "non-bonded goods" moving from EPZs to tax zones. Non-bonded goods entering tax zones will only be subject to a 5% business transaction tax. The revised regulations will also apply to bonded factories and manufacturing firms located in science industrial parks. The double taxation issue arose in April when Taiwan relaxed restrictions to allow manufacturing firms in the tax-free EPZs to produce non-bonded goods which were, therefore, subject to customs duties twice, i.e., on both entering and leaving EPZs. Science Park to Allow Industry Services -------------- ¶11. The Executive Yuan has submitted planned amendments to the "Management Statute for the Establishment of Science Parks" to the Legislative Yuan (LY) for review. The bill is designed to build a comprehensive business community within science industrial parks where industry services can be offered and unused factories can be rebuilt through title transfers, without resorting to forced sales. (Note: Land in science industrial parks is owned by the government. End Note.) The bill would allow companies serving industries to enter science industrial parks, including R&D organizations, incubation centers, banks, guesthouses, and conference centers. Land occupied by these service firms is subject to a ceiling of 5% of the park's total area. The legislation will encourage transfer of unused rent-free factories for a maximum of six months so the buyer can engage in construction, renovation and/or installation of new equipment. YOUNG