VZCZCXRO7443
RR RUEHGH
DE RUEHIN #2289/01 2780622
ZNR UUUUU ZZH
R 050622Z OCT 07
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC 7072
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUCPDOC/USDOC WASHDC
RUEHBK/AMEMBASSY BANGKOK 3833
RUEHBJ/AMEMBASSY BEIJING 7327
RUEHUL/AMEMBASSY SEOUL 8939
RUEHGP/AMEMBASSY SINGAPORE 7020
RUEHKO/AMEMBASSY TOKYO 9127
RUEHML/AMEMBASSY MANILA 0157
RUEHJA/AMEMBASSY JAKARTA 4132
RUEHKL/AMEMBASSY KUALA LUMPUR 3816
RUEHHI/AMEMBASSY HANOI 3391
RUEHBY/AMEMBASSY CANBERRA 4606
RUEHWL/AMEMBASSY WELLINGTON 1875
RUEHHK/AMCONSUL HONG KONG 8607
RUEHGH/AMCONSUL SHANGHAI 1394
RUEHGZ/AMCONSUL GUANGZHOU 0580

UNCLAS SECTION 01 OF 03 TAIPEI 002289 
 
SIPDIS 
 
SIPDIS 
 
STATE PLEASE PASS USTR 
STATE FOR EAP/RSP/TC, EAP/EP 
USTR FOR KATZ AND STRATFORD 
USDOC FOR 3132/USFCS/OIO/EAP 
TREASURY FOR OASIA/TTYANG AND HAARSAGER 
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 September 2007 
 
¶1.  Summary.  This cable summarizes selected September 2007 economic 
events in Taiwan.  Economic statistics show better than expected 
performance and potential job growth....Biggest share of next year's 
government budget goes to defense and deficit expected to shrink 
significantly....The Central Bank hikes interest rates in the face 
of building inflation pressures....Taiwan attracts investment from 
Taiwan businesses overseas and a major Japanese glass 
manufacturer....Penghu Islands included in the mini three links, 
sort of....Taiwan world's top producer of many high-tech 
products....Big plans for generating wind power offshore....TSMC 
gets inside XBOX....And, finally, new rules for calculating bank 
deposit insurance premiums.  END SUMMARY. 
 
Unexpectedly Strong Economic Performance 
---------------------------------------- 
¶2.  Taiwan's unexpectedly strong economic performance in July and 
August will likely prompt economic think tanks to further raise the 
island's 2007 real GDP growth estimates to 4.5-5.0%.  In these two 
months, Taiwan's trade surplus registered year-on-year growth of 
24%, a sharp contrast to the decline predicted for the third quarter 
(Q3) by economists.  Taiwan's year-on-year export growth accelerated 
to 9.3% in July-August and is expected to rise in Q4.  A 20% 
increase in export orders in July-August will translate into 
increased production later this year.  To meet stronger foreign 
demand, industrial production during these two months posted 
year-on-year growth of 12%, a new high over the past three years. 
Foreign direct investment in Taiwan approved in July-August nearly 
tripled, compared with the same period last year.  The unemployment 
rate stayed at 3.9%. 
 
Employment Increase Forecast 
---------------------------- 
¶3.  Taiwan's employment in Q4 is expected to report a net increase 
of 24,000, including 16,000 manufacturing jobs, according to a 
survey conducted by the Council of Labor Affairs.  Electronics 
firms, the backbone of Taiwan's industrial sector, will expand their 
workforces to meet growing delivery requirements in Q4.  Meanwhile, 
labor demand by construction firms is expected to decrease as 
several construction projects will be concluded later this year. 
Entertainment ventures, hotels, and restaurants will also see a 
decline in labor demand from September with the end of the summer 
holiday. 
 
Central Bank Raises Interest Rates 
---------------------------------- 
¶4.  While the U.S. Federal Reserve Board cut its benchmark rate by 
0.5 percentage points earlier this month, the Central Bank of China 
(Taiwan) (CBT) raised interest rates by 0.125 percentage points on 
September 20.  This reduced the interest rate gap between the United 
States (3.95% for one-year deposits) and Taiwan (2.465%) to 1.485 
percentage points, the narrowest for the past two years.   With 
higher interest rates, the CBT wants to preempt inflationary 
pressure, due in part to higher prices for imports of crude oil, 
grains, and other materials and to recent price rises of vegetables 
and fruits damaged by typhoons.  The consumer price index in August 
rose 1.6%, up from 1% in Q1 and 0.3% in Q2. 
 
2008 Central Budget Proposal 
---------------------------- 
¶5.  In early September, Taiwan's Executive Yuan submitted the 2008 
central budget proposal to the Legislative Yuan for consideration. 
The budget deficit in 2008 is expected to drop by 30% as planned 
revenue will grow faster than planned expenditure.  For the first 
time in eight years, defense spending, at 20% of the budget, will 
surpass education and social welfare to account for the largest 
share of the budget.  With a smaller deficit, Taiwan's outstanding 
public debt as a percentage of GDP is expected to decline to a 
 
TAIPEI 00002289  002 OF 003 
 
 
five-year-low of 30% in 2008. 
 
Asahi Glass to Build Two Glass Furnaces 
--------------------------------------- 
¶6.  Asahi Glass of Japan will build two glass substrate furnaces in 
the Southern Taiwan Science Park in Tainan, at a projected cost of 
NT$10 billion (US$303 million).  The project, together with glass 
cutting and grinding facilities currently under construction, will 
sharpen Asahi's competitive edge among substrate glass suppliers to 
Taiwan's flat panel manufacturers (in particular Tainan-based Chi 
Mei Optoelectronics). 
 
Attracting "Taishang" back to Taiwan 
------------------------------------ 
¶7.  In February 2005, the Ministry of Economic Affairs (MOEA) 
adopted a program to attract new investment from Taiwan firms that 
have some or all of their operations overseas.  Since then, 86 
projects have been identified by overseas Taiwan firms, with a total 
investment of NT$7.8 billion (US$236 million).  Of the 86 projects, 
12 have already been completed, 36 are underway, and the remaining 
38 are still in the planning stages.  The 86 investors include 34 
from China (mainly traditional manufacturing industries such as 
electronic and electrical appliances and machinery), 12 from 
Southeast Asia (mainly textiles, construction, and wood furniture), 
35 from North America (mainly biotechnology and IT), and five from 
New Zealand, Germany, Japan, and Africa (mainly IT, chemicals, and 
organic produce). 
 
Penghu Tacked on to Mini-Links 
------------------------------ 
¶8.  On April 1, 2007, Taiwan approved the expansion of the 
mini-links to include the Penghu Islands, which sit in the middle of 
the Taiwan Straits.  This means that Penghu residents can now use 
the existing ferry service via Kinmen and Matsu to travel to Fujian; 
Fujian residents can use the mini-links to cross over to Kinmen and 
Matsu and continue on to Penghu.  Fujian tourists to Penghu, 
however, are subject to a daily quota of 640.  On April 19, Penghu 
Magistrate Wang Ch'ien-fa led the first tourist group to Fujian. 
The first two tourist groups from Fujian to Penghu departed on 9/28 
and another on October 2. 
 
Much Has Changed in 24 Years 
---------------------------- 
¶9.  Taiwan's high-tech strengths are reflected in the list of 
products that it leads the world in producing.  According to the 
Council for Economic Planning and Development, these products are 
(with world market shares in parentheses):  Foundry OEM Chips 
(66.7%), IC packaging (47.8%), IC testing (60.3%), MASK ROM (91.4%), 
TN/STN-LCD panels (75.2%), TFT-LCD panels (45.7%), electrolytic 
copper foil (78.7%), CD-ROM (57%), ABS resin (20%), and electric 
mobility scooters and electric wheelchairs (45%).  This is a 
remarkable change from what the list looked like in 1983, when 
Taiwan was the world's largest supplier of shoes, electric fans, 
bicycles, bicycle tires, brakes, and chains, umbrellas, sewing 
machines, thermos bottles, monosodium glutamate, and camphor. 
 
Offshore Wind Turbine Program 
----------------------------- 
¶10.  In early September, the Ministry of Economic Affairs (MOEA) 
implemented the First Stage of the Offshore Wind Turbine Development 
Program.  The program calls for wind turbines to be built in six 
different areas in waters off Taiwan's west coast and Penghu.  The 
first offshore wind turbine is scheduled to begin operation in 2013. 
 These turbines will eventually provide power generation capacity of 
300,000 kilowatts.  Investment required by the program is estimated 
at NT$40 billion (US$1.2 billion).  At present, Taiwan has 127 
inland wind turbines whose combined installed capacity is 217,200 
 
TAIPEI 00002289  003 OF 003 
 
 
kilowatts.  The MOEA expects that by 2010, Taiwan's wind power 
capacity will reach 1.2 million kilowatts, with a yearly generation 
of 3.3 billion kilowatt-hours. This is sufficient to meet the power 
demand of 825,000 households. 
 
TSMC Receives Xbox Orders 
 
SIPDIS 
------------------------- 
¶11.  Taiwan Semiconductor Manufacturing Corp (TSMC) announced in 
mid-August that Microsoft has started production of its Xbox game 
consoles using TSMC's 90 nanometer embedded DRAM process.  Taiwan's 
downstream integrated circuits (IC) manufacturers, including 
Advanced Semiconductor Engineering (ASE), Silicon Precision 
Industries Co. Limited (SPIL), and King Yuan Electronics Corp 
(KYEC), will benefit from Xbox production by serving as a part of 
the Xbox supply chain.  As a result, Taiwan's consumer electronics 
exports in Q3 are estimated to grow by 10% over Q2. 
 
Change in Bank Deposit Insurance Premiums 
----------------------------------------- 
¶12.  The Central Deposit Insurance Corporation (CDIC), which insures 
bank deposits and is modeled after the FDIC in the U.S., has 
announced new rates for deposit insurance premiums and has changed 
the basis on which they are calculated.  These changes are 
retroactive to July 1.  Prior to the change, premiums were assessed 
only on insured deposits.  Now the premiums are assessed on total 
deposits.  In response to complaints from banks, the CDIC reduced 
most premium rates, especially for banking institutions with the 
healthiest balance sheets.  According to the Banking Bureau, there 
will be virtually no cost impact on local banks; because of a 
different deposit mix, foreign banks will see their premiums 
increase by 2% on average. 
 
YOUNG