VZCZCXRO7659
RR RUEHGH
DE RUEHIN #3407/01 2760845
ZNR UUUUU ZZH
R 030845Z OCT 06
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC 2433
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUCPDOC/USDOC WASHDC
RUEHBK/AMEMBASSY BANGKOK 3429
RUEHBJ/AMEMBASSY BEIJING 5735
RUEHUL/AMEMBASSY SEOUL 8141
RUEHGP/AMEMBASSY SINGAPORE 6632
RUEHKO/AMEMBASSY TOKYO 8087
RUEHML/AMEMBASSY MANILA 9813
RUEHJA/AMEMBASSY JAKARTA 3927
RUEHKL/AMEMBASSY KUALA LUMPUR 3568
RUEHHI/AMEMBASSY HANOI 3135
RUEHBY/AMEMBASSY CANBERRA 4332
RUEHWL/AMEMBASSY WELLINGTON 1564
RUEHHK/AMCONSUL HONG KONG 6947
RUEHGH/AMCONSUL SHANGHAI 0415
RUEHGZ/AMCONSUL GUANGZHOU 9594

UNCLAS SECTION 01 OF 03 TAIPEI 003407 
 
SIPDIS 
 
SIPDIS 
 
STATE PLEASE PASS USTR 
STATE FOR EAP/RSP/TC, EAP/EP 
USTR FOR ALTBACH 
USDOC FOR 3132/USFCS/OIO/EAP/WZARIT 
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: Taipei Economic Brief for September 2006 
 
 
¶1.  This cable summarizes selected September 2006 economic events in 
Taiwan: 
--Exports sustain Taiwan economic growth; 
--High-tech manufacturing grows; 
--Semiconductor counter-complaint; 
--More Taiwan technology flows to China; 
--Taiwan pharmaceutical plants; 
--State ownership in Chunghwa Telecom reduced; 
--IPR: Kuro to shut down; 
--New foreign currency bond market 
--Gasoline prices hike; 
 
Exports Sustain Economic Growth 
------------------------------- 
 
¶2.  Export expansion continued to sustain Taiwan's industrial 
growth, attract investment, and keep unemployment low.  Imports of 
capital goods grew by double-digits in July-August while approved 
inbound foreign investment registered a 60% increase.  Investment 
also contributed to increased production of high-tech equipment. 
However, political squabbles dampened stock market performance, 
keeping Taiwan's stock price index in a narrow range around 6,500 
points.  Nevertheless, foreign portfolio investors bought NT$73.6 
billion (US$2.3 billion) more stock than they sold in August, the 
second highest monthly net stock purchases in 2006. 
 
¶3.  The Taiwan Institute of Economic Research (TIER) predicts export 
expansion, together with new investment, will boost Taiwan's 
economic growth the rest of this year and next year.  Export orders 
in July-August increased nearly 20% over a year ago.  Taiwan's real 
GDP growth in 2006 should be above 4% and unemployment should start 
to decline from the 4.1% seasonal high it hit in August.  (Note: 
Unemployment rises in summer as new graduates join the labor market. 
 Taiwan's highest annual unemployment rates were 4.57% in 2001 and 
5.17% in 2002.) 
 
Growth in High-tech Equipment Manufacturing 
------------------------------------------- 
 
¶4.  A recent survey conducted by the Industrial Technology 
Intelligence Services (ITIS) showed that high-tech equipment 
manufacturing has become the fastest growing sector of the machinery 
industry.  This sector's production value increased 33% to NT$29.3 
billion (US$902 million) in 2005 and 48% to NT$22.3 billion (US$686 
million) in the first half of 2006.  Its production value in 2006 is 
expected to reach NT$41.7 billion (US$1.3 billion), up 42.3% from a 
year ago.  One factor behind the growth is that Taiwan high-tech 
companies are switching some manufacturing equipment orders to local 
suppliers.  These high-tech companies include Taiwan Semiconductor 
Manufacturing Company (one of the world's largest OEM chip makers), 
Hon Hai Precision (whose subsidiary was rated as the top foreign 
exchange earner in China), and flat panel display plants (Taiwan is 
rated as the third largest flat panel display supplier in the 
world). 
 
SIMC Files Counter-complaint against TSMC 
----------------------------------------- 
 
¶5.  In a counter-complaint, Semiconductor Manufacturing 
International Corp. (SMIC) in China is seeking damages from Taiwan 
Semiconductor Manufacturing Co. (TSMC) for breach of contract and 
good faith.  In August, TSMC, the world's biggest contract chip 
maker, filed a lawsuit in a California court against SMIC's 
Shanghai, Beijing, and U.S. operations alleging breach of a 2005 
agreement that settled a patent and trade secrets dispute. 
Shanghai-based SMIC is China's largest chip foundry by capacity. 
 
 
TAIPEI 00003407  002 OF 003 
 
 
He Jian to Use More Advanced Technology in Mainland 
--------------------------------------------- ------ 
 
¶6.  According to media reports, He Jian, the PRC semiconductor 
foundry closely linked to Taiwan's United Microelectronic 
Corporation (UMC), is raising funds to build a 12-inch semiconductor 
wafer fab in the PRC.  He Jian already produces chips with 
0.15-micron feature size and its chairman reportedly said it was in 
the process of developing 0.13-micron production technology.  This 
news will complicate UMC's efforts to legalize its relationship with 
He Jian.  UMC has applied to the Taiwan authorities for permission 
to accept a 15-percent stake in the firm in exchange for 
non-financial assistance that UMC has already provided the Mainland 
firm.  Taiwan currently permits semiconductor investment in the PRC 
only in 8-inch fabs using 0.25-micron technology.  It may soon agree 
to permit 0.18-micron technology, but so far the authorities have 
not indicated that they are considering allowing investment using 
0.13-micron technology or 12-inch wafer fabs. 
 
Taiwan Returnees Form New Pharmaceutical Firms 
--------------------------------------------- - 
 
¶7.  A growing number of Taiwan high-tech people have returned from 
the United States to set up pharmaceutical companies in Taiwan. 
This trend may help advance Taiwan's pharmaceutical technologies to 
international standards.  Taiwan people who have returned from the 
U.S. pharmaceutical sector include Allan Chao of the pharmaceutical 
giant Watson, Chen Chih-ming, founder of Andrx, and Larry Hsu, 
president of Impax Labs.  Watson, which operates a huge distribution 
network in the United States, now relies on its Taiwan subsidiary 
ScinoPharm as a major source of pharmaceutical products.  Impax Lab, 
whose 2005 revenue totaled US$200 million, will build two factories 
in Hsinchu with a total investment of US$123 million. 
 
State Ownership in Chunghwa Telecom Reduced 
------------------------------------------- 
 
¶8.  On September 28, Taiwan authorities sold 120 million shares in 
Chunghwa Telecom (CHT) in Taiwan and 505 million shares as American 
Depository Receipts (ADR) in New York.  The sales have reduced state 
ownership in CHT from 41% to 34% and brought estimated revenue of 
NT$33 billion (US$1.02 billion) to Taiwan's treasury.  The share 
price for local sales was NT$51, 6.8% lower than the ten-day average 
prior to September 28.  In New York, subscriptions to the ADR 
exceeded US$1 billion.  Taiwan authorities cannot sell any more CHT 
shares unless the official floor on state-ownership in CHT is 
reduced below 34%. 
 
Kuro Settles with IFPI 
---------------------- 
 
¶9.  On September 14, Kuro, an unauthorized Taiwan P2P file-sharing 
service, reached a settlement with the International Federation of 
the Phonographic Industry (IFPI) to shut down its P2P operations and 
pay compensation to IFPI-represented companies.  Taiwan's criminal 
court convicted Kuro of copyright infringement in September 2005. 
Kuro will be reorganized into a new venture called C-Media 
Electronics which will operate a legitimate music download website 
called New Kuro.  According to the settlement, Kuro will continue 
some of its services to its estimated 500,000 subscribers until New 
Kuro replaces Kuro.  IFPI General Counsel and Executive 
Vice-President Geoff Taylor confirmed the settlement and predicted a 
bright future for legal online music services in Taiwan. 
 
Foreign Currency Bond Market 
---------------------------- 
 
 
TAIPEI 00003407  003 OF 003 
 
 
¶10.  Taiwan has started a foreign currency bond market and expects 
the first listing in the market in October.  Foreign governments, 
international organizations, and companies may issue foreign 
currency-denominated bonds in the market.  Deutsche Bank reportedly 
plans to issue US$300-500 million of bonds in October if 
preparations go smoothly.  Several other foreign companies have 
reportedly expressed an interest in issuing foreign currency bonds. 
Over 20 underwriters have applied to the Foreign Exchange Department 
under Taiwan's Central Bank of China for foreign currency bond 
underwriting licenses.  Taiwan authorities hope the total value of 
bonds listed on the foreign currency market will reach NT$100 
billion (US$3.1 billion) by the end of 2009. 
 
Gasoline Price Hike 
------------------- 
 
¶11.  The state-owned China Petroleum Corporation (CPC) announced a 
NT$0.9 per liter reduction in the wholesale price of gasoline and 
diesel starting September 26.  This price cut begins the start of a 
trial period lasting until the end of the year where gasoline prices 
will fluctuate with international petroleum prices.  This free 
market approach to gas prices will not necessarily benefit CPC, 
which has been saddled with financial losses amounting to NT$25.4 
billion (US$769.7 million) because of higher petroleum prices. 
 
WANG