VZCZCXYZ0047
RR RUEHWEB

DE RUEHIN #1154/01 0930813
ZNR UUUUU ZZH
R 030813Z APR 06
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC 9498
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUCPDOC/USDOC WASHDC
RUEHBK/AMEMBASSY BANGKOK 3226
RUEHBJ/AMEMBASSY BEIJING 5008
RUEHUL/AMEMBASSY SEOUL 7731
RUEHGP/AMEMBASSY SINGAPORE 6413
RUEHKO/AMEMBASSY TOKYO 7593
RUEHML/AMEMBASSY MANILA 9700
RUEHJA/AMEMBASSY JAKARTA 3836
RUEHKL/AMEMBASSY KUALA LUMPUR 3475
RUEHHI/AMEMBASSY HANOI 3054
RUEHBY/AMEMBASSY CANBERRA 4175
RUEHWL/AMEMBASSY WELLINGTON 1483
RUEHHK/AMCONSUL HONG KONG 6199
RUESLE/AMCONSUL SHANGHAI 8571
RUEHGZ/AMCONSUL GUANGZHOU 9181

UNCLAS AIT TAIPEI 001154 
 
SIPDIS 
 
SIPDIS 
 
STATE PLEASE PASS AIT/W AND USTR 
 
STATE FOR EAP/RSP/TC, EAP/EP 
 
USTR FOR WINTER AND WINELAND 
 
USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER 
USDOC FOR 3132/USFCS/OIO/EAP/ADAVENPORT 
TREASURY FOR OASIA/LMOGHTADER 
TREASURY PLEASE PASS TO OCC/AMCMAHON 
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:  Economic Briefing for March 2006 
REF: TAIPEI 980 
 
¶1.  This cable summarizes selected recent economic events in Taiwan 
in March 2006: 
 
--Economy clouded by card debt, fuel costs 
--Capital outflows continue 
--Credit/cash card debt hurts banks profits 
--Tightened control of cross-Strait trade 
--Corning locates largest R&D center in Taiwan 
--DuPont joins fire retardant closing market from Taiwan 
--Taiwan sets up first solar cell testing center 
--Taiwan machine tool exports 
--High infotech ranking 
 
Taiwan's Economy Clouded by Card Debt and Fuel Costs 
--------------------------------------------- ------- 
 
¶2.  Taiwan's positive economic performance in the second half of 
last year has continued into Q1 this year.  Export growth on a 
year-on-year basis in the first two months remained at the Q4 2005 
level of 14%, rising from 7% in Q3 last year.  Industrial growth 
January-February also reached the Q4 2005 level of 9%, (compared to 
below 5% in Q3 2005).  Inflation of 1.88% and unemployment of 2.86% 
were lower than 2005 rates.  Consequently, local think tanks 
estimate Taiwan's Q1 2006 economic growth well above 4%, with the 
Statistical Bureau estimating a rate of 5.1%. 
 
¶3.  Taiwan's export growth will continue in Q2 as export orders (to 
which shipments will be made in three to six months) grew 22% in 
January-February.  However, the government's recent measures to 
address delinquent credit/cash card debt have caused concern about 
contraction of consumer lending which may dampen private consumption 
and drag economic growth.  Another negative factor for Taiwan's 
economy is higher energy prices, which have contributed to a 120% 
year-on-year increase in the cost of crude oil imports in the first 
two months this year. 
 
Capital Outflow Erodes Taiwan's BOP Status 
------------------------------------------ 
 
¶4.  Taiwan in 2005 had a trade surplus of US$18 billion, which more 
than offset its services trade deficit and net capital outflow, and 
which pushed up Taiwan's foreign exchange (FX) reserves by 4.8% to 
US$253 billion.  An export boom late last year contributed to an 
11.5% expansion in Taiwan's 2005 trade surplus.  However, foreign 
investors' repatriation of earnings doubled and higher interest 
rates overseas prompted the outflow of local capital to surge 51%. 
These factors offset a large part of the trade sector's contribution 
to the balance of payments (BOP) and resulted in a 24.5% decline of 
Taiwan's 2005 overall balance to US$20 billion.  The 2005 surplus 
would have dropped to US$10.5 billion if the central bank had not 
made repurchase agreements to meet growing FX demand.  Without the 
CBC repurchase agreements, Taiwan BOP would have been in deficit in 
Q2 last year, and the deficit would have increased from US$300 
million in Q2 to US$3.1 billion in Q3 and US$1.1 billion in Q4. 
 
Card Debt Response Impacts Banks 
-------------------------------- 
 
¶5.  Media and legislative pressure has forced Taiwan regulators to 
adopt a series of measures this month to protect consumers from 
debt: Banks may not issue credit/cash cards to teenagers and must 
set a strict credit limit for students.  Banks may not use 
 
 
sensational credit/cash card advertisements, and must waive interest 
on card debt if rescheduling negotiations start before April 10. 
Harassing and violent debt collection methods are banned, as are new 
debt collection firms.  The legislature is still considering an 
interest rate cap and personal bankruptcy bills.  In response, 
several banks have stopped issuing credit/cash cards, and some have 
even shut down their card departments. 
 
Regulation of Cross-Strait Economic Exchanges Increased 
--------------------------------------------- ---------- 
 
¶6.  In his New Year Statement delivered on January 1, Chen Shui-bian 
announced a policy of "active management, effective opening" towards 
cross-Strait economic exchanges.  The Executive Yuan (EY) 
promulgated a set implementation measures on March 22.  The measures 
will tighten regulations covering travel of PRC nationals to Taiwan, 
agricultural exports to China, large investments in China, and 
capital flows to China. 
 
¶7.  Specifically, Taiwan will ban entry of tourists from the PRC's 
Fujian, Hebei, and Guangdong provinces (large numbers of tourists 
from these provinces end-up staying permanently); double the return 
guaranty the Taiwan tourist agency must deposit (from NT$1 million 
to NT$2 million); and require the Taiwan Tourist Agent Association 
to set stricter regulations for their members.  Taiwan will 
crackdown on agricultural smuggling into Taiwan by doubling the 
award for information and requiring coastal fishing boats to install 
vessel monitor systems.  Taiwan will increase its monitoring of 
agricultural exports to China and forbid PRC crewmembers from 
working on small fishing and entertaining vessels.  Projects with an 
investment exceeding US$20 million will be subject to "policy" 
screening and post-investment follow-up, in addition to normal 
review by the Foreign Investment Commission.  The screening process 
will cover financial management plans, technology transfers, 
equipment exports, and counter investment in Taiwan.  Taiwan will 
increase the frequency of examinations of over financial firms' 
subsidiaries, branches and representative offices in Hong Kong and 
China.  Taiwan banks' offshore banking units (OBU), subsidiaries, 
and branches are required to closely monitor their lending to 
business firms in China, and make regular reports to regulators. 
(For more details, see reftel.) 
 
Corning opens major R&D center at ITRI 
-------------------------------------- 
 
¶8.  Corning established its largest research and development center 
in Asia at Taiwan's Industrial Technology Research Institute (ITRI) 
in mid March.  Corning will use the center chiefly to develop 
technologies of glass substrate for liquid crystal displays (LCD), 
one of the backbones of Taiwan's industrial sector.  In the future, 
the center will research fuel cells, biophotonics, optical fiber and 
semiconductors.  This new center in ITRI is Corning's fifth in the 
world.  Its four other R&D centers are located in the United States, 
France, Russia and Japan.  Corning selected Taiwan for its largest 
R&D center in Asia because of major investments here including LCD 
glass substrate facilities in both the Southern Taiwan Science Park 
in Tainan and the Central Taiwan Science Park in Taichung.  In 
January, Corning officially opened its Taichung plant, the company's 
largest investment in a single production facility in the world with 
a construction cost of USD 1.5 billion. 
 
Dupont's Fire Retardant Clothing Project 
 
---------------------------------------- 
 
¶9.  DuPont has begun cooperating with Formosa Taffeta to use 
DuPont's Nomex fibers for manufacture of fire-retardant clothing. 
This project marks DuPont's first move from manufacturing and 
marketing of Nomex into the Nomex fabric and clothing market.  With 
its eyes on Taiwan's massive petrochemical industry, DuPont sees a 
big potential fire-resistant protective clothing market in Taiwan. 
Formosa Petrochemical Corporation and Taiwan Power Company are the 
two largest users of Nomex-made protective wear in Taiwan.  Formosa 
Petrochemical alone accounts for about 80% of the total demand.  One 
Nomex fire-resistant suit cost about NTD 4,500.  DuPont's Nomex 
fibers, on the market for over thirty years, have been used to make 
heat- and flame-resistant clothing for firefighting, auto racing and 
electricity generation.  Nomex fibers are also used for electrical 
insulation. 
 
Taiwan's First Solar Cell Testing Center 
---------------------------------------- 
 
¶10.  With solar cells set to be one of the next major industries in 
Taiwan, Taiwan's Industrial Technology Research Institute signed on 
March 14 a cooperation contract with TV Rheinland Group of Germany 
for establishing Taiwan's first photovoltaic module testing 
laboratory.  The laboratory will speed up delivery of solar products 
to foreign buyers by testing and certifying the products locally. 
The production value of Taiwan's solar industry in 2005 totaled NTD 
7 billion of which solar cells accounted for NTD 5.4 billion.  The 
global production value of the solar sector in 2010 is expected to 
reach NTD 230 billion of which Taiwan is expected to contribute NTD 
14 billion. 
 
Taiwan's Machine Tool Exports 
----------------------------- 
 
¶11. In 2005, Taiwan's machine tool exports increased 18 percent to 
reach a total value of US$2.7 billion.  Taiwan is the world's fourth 
largest machine tool exporter, after Japan, Germany and Italy. 
Exports of metal-cutting machines, including machining centers and 
lathes, during the year increased by 18.5 percent while exports of 
metal-forming machine tools was up 17.2 percent.  Hong Kong and 
Mainland China together took 41 percent or US$1.1 billion of 
Taiwan's total machine tool exports.  The U.S. was the second 
biggest export market with shipment of US$260 million.  Other major 
markets included: Turkey, Thailand, South Korea, Netherlands, 
Malaysia, and the U.K.   Vice President Wang Cheng-ching of the 
Taiwan Association of Machinery Industries (TAMI) predicts that 
production and exports of machine tools will enjoy 10 percent growth 
in 2006. 
 
Taiwan An Information Age Leader 
-------------------------------- 
 
¶12.  Taiwan was ranked seventh out of 115 world economies in terms 
of its information and technology developments, according to the 
Global Information Technology Report 2005-2006 Network Readiness 
Index rankings.  Among Asian economies, Taiwan was ranked higher 
than Japan and Hong Kong, and was second to Singapore. 
 
YOUNG