Taipei Economic Brief for March 2007

UNCLAS SECTION 01 OF 03 TAIPEI 000725 SIPDIS 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 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 March 2007 ¶1. This cable summarizes selected March 2007 economic events in Taiwan: --Improved Economic Performance --Taiwan's FX Reserves Increase --Taiwan Targets Insider Trading --SMIC Investment Fine Overturned --Taiwan's First 8G TFT-LCD Plants --Taiwan IC Industry Grows in 2006 --Taiwan Electronic Components Industry Keeps Growing --Labor Pension Management Committee to Begin Function --Taiwan Orchids --Taiwan's "Solar City" --Efforts to Reduce Greenhouse Gases Improved Economic Performance -------------- ¶2. Taiwan improved its economic performance in the first two months of 2007 when manufacturing production increased 1.55% on a y-o-y basis, up from the 0.5% growth in Q4 of 2006. Exports rose 7.6% from a year ago, up from 5.6% growth in Q4 and better than the 6.5% estimated by the Directorate General of Budget, Accounting and Statistics (DGBAS) earlier this year. The Jan-Feb trade surplus of US$4.1 billion was 82% more than predicted. Export order growth also increased from 9.6% in Q4 to 13% in Jan-Feb 2007. Unemployment in February declined to a six-year low of 3.79%. The consumer price index rose only one percent. The unexpectedly good economic performance will prompt the DGBAS to upwardly adjust the next national income estimates in May. Taiwan's FX Reserves Increase -------------- ¶3. Taiwan's current account surplus in 2006 surged nearly 60% to US$25 billion from double-digit expansion of exports, growth in triangle trade (orders placed in Taiwan and shipped from elsewhere) income, and interest on Taiwan's foreign exchange (FX) reserves. The C/A surplus was largely offset by outflows of direct investment and insurance firms' portfolio investment. Depreciation of the US Dollar (USD) drove up the USD value of Taiwan's EURO and Yen FX reserves. The FX reserves held by Taiwan's Central Bank (before valuation adjustment) increased US$6.1 billion, and after valuation adjustment increased US$13 billion. Taiwan's valuation-adjusted FX reserves in December 2006 totaled US$266 billion, about 30% of which are in the Euro and Japanese yen. Taiwan Targets Insider Trading -------------- ¶4. Taiwan's prosecutors have come down hard on insider trading. In the past three years, Taiwan's prosecutors have begun investigations of 155 suspected insider trading cases referred to them by financial regulators. In mid-March they searched offices and questioned senior executives at BenQ (one of the largest personal computer suppliers in the world) and Veutron (image scanner affiliated to PowerChip, one of the major semiconductor firms in Taiwan). In the long run, an effective functioning regulatory system will help Taiwan's business sector and deepen its democracy. SMIC Investment Fine Overturned -------------- ¶5. The Taipei High Administrative Court (THAC) announced on March 15 that it had found Semiconductor Manufacturing International Company (SMIC) CEO Richard Chang not-guilty of illegal investment in China. Taiwan's Ministry of Economic Affairs (MOEA) had found in TAIPEI 00000725 002 OF 003 March 2005 that Chang, a former Taiwan Semiconductor Manufacturing Company executive, had invested in China-based SMIC without the MOEA's approval in violation of Taiwan's investment regulations. Chang filed an appeal with the THAC and applied to give up his Taiwan citizenship. The court found that evidence submitted by the MOEA was not enough to prove Chang had personally invested in SMIC. The court asked Taiwan's MOEA to nullify the NT$5 million (US$150,000) fine imposed on Chang. It was the first reversal of an MOEA penalty of this kind. The MOEA will appeal the decision with the Supreme Administrative Court. Taiwan's First 8G TFT-LCD Plants -------------- ¶6. Auoptronics recently announced that it will build three eighth generation (8G) TFT-LCD plants in the Central Taiwan Science Park (CTSP). Each 8G TFT-LCD plant will require an investment of NT$110 billion (US$3.3 billion). Construction will begin late this year. At present, only Sharp (of Japan) has an 8G TFT-LCD plant, which started mass production last year. Samsung (of South Korea) is constructing an 8G plant scheduled to begin mass production in H2 ¶2007. Currently, Auoptronics has 12 TFT-LCD plants in Taiwan, with three located in the CTSP, two in Miaoli, and seven in the Hsinchu Science Park. In response to Taiwan's advance 8G TFT-LCD plants, Dupont (of the United States) will start building a flat panel display testing lab in Q3 2007 to meet Taiwan flat panel manufacturers' demand. Taiwan IC Industry Grows in 2006 -------------- ¶7. Output of Taiwan's Integrated Circuit (IC) industry in 2006 totaled NT$1,393 billion (US$42 billion),an increase of 24.6 percent over 2005. Taiwan outpaced the global IC industry, which grew by 8.9 percent. The Taiwan Semiconductor Industry Association (TSIA) predicts that Taiwan IC industry's growth will slow to 11.5% in 2007 with output of NT$1,554 billion (US$47 billion). IC manufacturing will grow 9% to NT$835 billion (US$25 billion) this year. IC design output values will be NT$370 billion (US$11 billion) with a 14% growth, IC packaging will be NT$246 billion (US$7.5 billion) with a 17% growth, and IC testing will be NT$103 billion (US$3 billion) with an 11% growth. Taiwan Electronic Components Industry Keeps Growing -------------- -------------- ¶8. In 2006, production of Taiwan's electronic components industry increased 12% to NT$666.2 billion (US$20 billion). The Industry and Technology Intelligence Services' (ITIS) expects the industry will grow another 12% in 2007 to US$746.5 billion (US$22.6 billion) as demand for information technology (IT) products, telecommunications, consumer electronics, electronic auto devices, and game consoles will continue to grow. The ITIS believes that overseas production (mainly in China) of Taiwan electronic components industry's export orders will increase further after the ratio advanced from 50% in 2005 to 52% in 2006. Taiwan Orchids -------------- ¶9. The Council of Agriculture sponsored an international orchid show at Houbi, Tainan County in mid-March. About 2,000 foreign orchid distributors from 22 nations (including the United States, Japan, and Europe) attended the show. Among them, California-based Matsui Nursery, the largest potted orchid distributor in the world, placed huge orders with Taiwan growers. Matsui Nursery supplies 50% of the California market and 20% of the entire U.S. market. TAIPEI 00000725 003 OF 003 Labor Pension Management Committee to Begin Function -------------- -------------- ¶10. The Legislative Yuan (LY) completed legislation of the Labor Pension Management Committee Statute on March 2. The legislation will become a legal basis for "investment" of pension funds. As of February 2007, 4.29 million people had joined the pension program, and their contribution to the pension program had reached NT$140 billion (US$4.2 billion). Prior to the legislation, the pension program was not permitted to invest its reserve funds in any assets other than bank deposits. The Council of Labor Affairs (CLA) expects to double the rate of return to 4% in the future. Taiwan to Build "Solar City" -------------- ¶11. Taiwan will construct a "solar city" at the Southern Taiwan Science Park (STSP). The five-year project will require NT$1.2 billion (US$36 million) to build solar energy facilities for 4,000 household users. Solar energy will be available to 800 users in the first year, and increase by 800 each of the next four years. By the fifth year, the project will produce 14.78 million kilowatt-hours of electricity, an amount sufficient to meet the demand of the 4,000 users and public infrastructure of the solar city. Tainan where the STSP is located is suitable for solar energy as it enjoys abundant sunshine and is home to the world's largest cluster of solar optoelectronics companies, including Motech and Eton. Efforts to Reduce Greenhouse Gases -------------- ¶12. Recently, the Taiwan Semiconductor Industry Association (TSIA) and the Taiwan TFT-LCD Association voluntarily signed an agreement with the Ministry of Economic Affairs (MOEA) on reduction of their greenhouse gas emissions. Under the agreement, 16 companies of the two associations promised to reduce their carbon dioxide emissions by 24 million tons between 2006 and 2010. A total of 125 companies in six industries in Taiwan signed similar agreements with the MOEA in 2005, promising to reduce energy consumption by 1.39 million kiloliters oil equivalent and cut carbon dioxide emission by 4.02 million metric tons. The six industries include synthetic fiber manufacturers, printing/dyeing/finishing, papermaking, petrochemical, iron and steel, and cement. WANG