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DE RUEHIN #0176/01 0360324
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TO RUEHC/SECSTATE WASHDC 8078
RUEATRS/DEPT OF TREASURY WASHDC
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UNCLAS SECTION 01 OF 04 TAIPEI 000176 
 
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 SENV TW
SUBJECT: Taipei Economic Brief for January 2008 
 
¶1.  (U) Summary.  Here are the highlights of January 2008 economic 
events in Taiwan.  Taiwan's economy outperformed expectations in 
2007, with capital outflow partly offsetting inflationary 
pressure....  Taiwan's 2008 economic outlook less optimistic.... 
Initial public offerings in 2007 set a three-year high....   Four 
state-owned banks morph into Taiwan's largest financial holding 
firm.... Mini-links Ferry boat passengers posted double-digit 
growth....  Tax incentives adopted for foreign expats.... 
High-speed rail hurts airlines, busses and slow trains....   Taiwan 
goes green with new Greenhouse Emission Management Office subsidies 
for cleaner cars....  Asahi Glass to build polysilicon plant for 
solar power industry....  Think Yachts - Think Taiwan...  No, Taiwan 
has no plans for a sovereign wealth fund.  END SUMMARY. 
 
Taiwan's 2007 Economic Performance - Underestimated? 
--------------------------------------------- ------- 
¶2.  Taiwan's economy outperformed expectations in the second half of 
2007, and final figures for Taiwan's 2007 real GDP growth are likely 
to exceed the current official preliminary figure of 5.46%.  In 
2007, export growth accelerated throughout the year, reaching 15% in 
the fourth quarter, well ahead of earlier forecasts. Manufacturing 
growth also accelerated from 1% in Q1 to 14% in Q4.  Electronic and 
electrical parts/components which account for 40% of merchandise 
exports posted 21% growth in 2007, with the Q4 y-o-y growth 
exceeding 30%.  Chemicals also reported a sharp increase in 
production growth from 3% in Q1 to 18.5% in Q4.  Accelerated growth 
in wholesale/retail sales as well as imports of consumer goods fed 
the expansion of private consumption.  Private investment also 
gained momentum as imports of capital goods grew 3% in 2007, after 
virtually no growth in 2006.  Taiwan's Unemployment in 2007 leveled 
off at just under 4%. 
 
Capital Outflow Partly Offsets Inflationary Pressure 
--------------------------------------------- ------- 
¶3.  Typhoons and higher import costs for energy and commodities 
pushed Taiwan's year-on-year inflation rate to a 13-year high of 
5.3% in October.  The inflation rate subsequently declined to 3.3% 
in December after the typhoon season passed.  The import-driven 
inflationary pressure has been partly offset by net capital outflows 
which reduced M1B money supply growth in December 2007 to 1.07%, a 
seven year low.  The M2 money supply growth at 1.36% was the lowest 
since 1982.  (Note:  M1B refers to money circulating in the economy 
plus checking account deposits, and M2 refers to M1B plus savings 
deposits.  End Note.) 
 
2008 Outlook Less Rosy 
---------------------- 
¶4.  In 2008, exports are likely to expand in Q1 by double-digit 
rates as export orders which grew by 18% y-o-y in Q4 of 2007 are 
likely to be produced and delivered in Q1 of 2008.  Later in the 
year, however, an anticipated economic slowdown in the U.S. and 
other developed economies will likely translate into a slowdown in 
Taiwan's export expansion and its economic growth.  Official 
forecasts call for 2008 real GDP growth of 4.5%.  This is in the 
range of most private forecasts which fall between 4.0-4.5%. 
Deutsche Bank and Standard Chartered Bank are more pessimistic, 
forecasting only 3.6% and 2.8%, respectively. 
 
Initial Public Offerings (IPOs) Set 3-year High 
--------------------------------------------- -- 
¶5.  In 2007 there were 70 IPOs in Taiwan, a three-year high.  The 
IPOs include 30 on the Taiwan Stock Exchange (TSE) and 40 on the 
Over-the-counter market (OTC).  The Financial Supervisory Commission 
set targets of 85 IPO's in 2008 and 95 in 2009.  To achieve the 
goals, in January 2008, the FSC relaxed requirements for firms to 
list on the island's stock markets.  Minimum capital and market 
value requirements were eliminated for OTC listings.  For the TSE, 
 
TAIPEI 00000176  002 OF 004 
 
 
the minimum capital requirement was lowered from NT$600 million to 
NT$300 million (US$9.2 million). 
 
Four State Banks Merge 
---------------------- 
¶6.  Four state-owned banks  - Bank of Taiwan, Land Bank of Taiwan, 
Central Trust of China, and Export-Import Bank  - were merged into 
Taiwan Financial Holdings, a new 100% government-owned financial 
holding company on January 1.  With assets totaling NT$5.12 trillion 
(US$157.5 billion), it is the largest financial institution in 
Taiwan and the 89th largest in the world.  Its assets account for 
18% of the banking sector's total assets.  The merger has reduced 
the number of state-controlled banks to seven, although these firms 
still dominate the banking sector with a market share of 51% in 
terms of assets and 56% in terms of loans. 
 
Mini Three Links 
---------------- 
¶7.  The number of ferry boat passengers between Taiwan's 
Kinmen/Matsu and the PRC's Xiamen, Chuanzhou and Fuzhou grew 16% to 
a new high of 391,930 in 2007.  This equals ten percent of total 
passengers between Taiwan and Hong Kong/Macao.  The number of Taiwan 
passengers posted a growth of 15% to 338,618 which accounted for 86% 
of total cross-Strait passengers by ferry boat.  The number of 
Chinese passengers surged 27% to 53,322.  The number of port calls 
by ferry boats in 2007 increased 21% to 5,391 of which 40% was made 
by PRC-based ferry boats. 
 
Tax Incentives for Employment of Foreign Experts 
--------------------------------------------- --- 
¶8.  Effective January 2008, the Ministry of Finance (MOF) adopted 
new tax incentives for certain foreign expatriates in Taiwan. 
Travel expenses for expatriates and their families, home leave, 
moving costs, utility bills, house rental and repair, and education 
for children will be excluded from income.  For employers, the 
expenditures can be treated as operating expenses and deducted from 
the taxable income. 
 
High-speed Rail Cheers; Bus, Train, Plane Tears 
--------------------------------------------- -- 
¶9.  Taiwan's high-speed railway (HSR), which began commercial 
operation in January 2007, has caused a drastic drop in air 
passengers.  Revenue from domestic flights along Taiwan's populated 
west coast plunged 60% in 2007.  Unable to compete with HSR, 
domestic airlines, have already suspended flights from Taipei to 
Taichung, Chiayi and Pingtung. Far East Transport (or FAT) plans to 
suspend Taipei - Tainan flights in March.  Adding insult to injury, 
the Taiwan post office has started using HSR to transport express 
mail.  Busses and "normal" trains are also feeling the competitive 
pressure.  The number of long-distance non-high-speed railway 
passengers declined 30%, and the number of long-distance bus 
passengers dropped 20%.  The Taiwan Railway Administration will 
reduce non-high speed rail tickets to attract passengers.  Expect 
more pressure in 2008 as the number of high-speed rail passengers is 
expected to double. 
 
Exposure to Sub-prime Mortgage Products 
--------------------------------------- 
¶10.  Banks and other financial service firms continue to report 
exposure to collateralized debt obligations (CDOs) and structured 
investment vehicles (SIVs) which may be linked to the U.S. sub-prime 
mortgage crisis.  According to the Financial Supervisory Commission 
(FSC) as of December 2007 exposure to CDOs increased from NT$75 
billion (US$2.3 billion) in August to NT$81.94 billion (US$2.5 
billion). The updated exposure included NT$58.59 billon (US$1.8 
billion) for 21 Taiwan banks and NT$39.5 billion (US$1.2 billion) 
for 12 insurance companies, and NT$4.6 billion (US$141 million) for 
 
TAIPEI 00000176  003 OF 004 
 
 
holders of five mutual funds.  In addition, exposure to structured 
investment vehicles (SIVs) totaled NT$21.38 billion (US$658 
million), including NT$20.52 billion (US$631 million) for banks and 
NT$1.23 billion (US$38 million) for insurance firms.  These numbers 
do not represent losses, but overall holdings of CDOs and SIVs. 
Separately, as of December 2007, estimated losses in the CDO and SIV 
asset categories were NT$23.7 billion (US$729 million), including 
NT$22 billion (US$677 million) for banks and NT$6.87 billion (US$211 
million) for insurance companies.  This has eroded 10% of Taiwan 
financial institutions' profits in 2007 which remained about NT$150 
billion (US$4.6 billion). 
 
Greenhouse Gas Reduction Management Office 
------------------------------------------ 
¶11.  On January 10, Taiwan's Environmental Protection Administration 
(EPA) inaugurated the Greenhouse Gas Reduction Management Office. 
Fifty-four manufacturing firms in the electricity, iron & steel, and 
petrochemical industries have voluntarily reported their GHG 
emissions.  The EPA expected the number of reporting firms will 
reach 100 within one year and 300 over the next three years. 
 
EPA Subsidizes Cleaner Cars 
--------------------------- 
¶12.  Taiwan's EPA adopted a subsidy program to promote cleaner cars. 
 EPA will reduce the commodity tax by NT$25,000 (US$769) for the 
purchase of a hybrid car or a car fueled by liquid petroleum gas 
(LPG).  In addition, the EPA will provide buyers a separate subsidy 
of NT$25,000 (US$769).  The EPA will also subsidize the cost of LPG 
fuel by NT$2 (about 6 US cents) per liter. 
 
Asahi Glass to Build Solar-grade Polysilicon Plant 
--------------------------------------------- ----- 
¶13.  Asahi Glass, whose major shareholder is California-based 
Silicon Research Inc (SRI), will build a solar-grade polysilicon 
plant in central Taiwan.  Polysilicon is a key material for 
photovoltaics.  The plant is expected to begin commercial operation 
late this year.  In the next three-to-five years, the new plant's 
annual production will increase to 10,000 tons of solar-grade 
polysilicon which will be sufficient to meet demand by a growing 
number of solar photovoltaic (PV) manufactures in Taiwan.  According 
to the Industrial Development Bureau, 24 new companies entered 
Taiwan's solar PV industry in 2007. 
 
Taiwan 5th in Yacht Building 
---------------------------- 
¶14.  The US yachting magazine "ShowBoats International" ranked 
Taiwan the fifth largest in yacht builder in the world.  In 2007 
Taiwan builders received orders for 71 super yachts, those at least 
80 feet long.  The total number of feet on order with Taiwanese 
builders in 2007 was 6,867 feet, a 60% increase over 2006. 
According to Taiwan's Industrial Development Bureau, Taiwan yacht 
builders hold 6% of the global market, behind Italy's 43.6%, the 
United States' 11.7%, the Netherlands' 9.2%, and Germany's 8%. 
According to Showboats' latest rankings, three Taiwan companies were 
ranked among global top twenty:  Horizon (12th), OceanAlexander 
(16th), and KhaShing (17th). 
 
Not a Sovereign Wealth Fund 
--------------------------- 
¶15.  Local media recently reported that Taiwan intended to set up a 
sovereign wealth fund.  The fund in question, named Taiwan 
International Development Corporation (TIDC), will have NT$2 billion 
(US$61.5 million) in capital, with Taiwan authorities contributing 
40% and the remaining 60% from the private sector.  The Ministry of 
Economic Affairs clarified that TIDC is not a sovereign wealth fund, 
and that the government's contribution to TIDC does not come from 
Taiwan's foreign exchange (FX) reserves.  Private shareholders 
 
TAIPEI 00000176  004 OF 004 
 
 
dominate TDIC, which is designed to seek construction opportunities 
in the Persian Gulf Region (a market which is expected to reach 
US$6.6 trillion).  The Central Bank has repeatedly stated that it 
may not use Taiwan's FX reserves to serve any official investment 
purpose.  The Central Bank said capital funds brought into Taiwan by 
foreign portfolio investors constitute about half of Taiwan's FX 
reserves, and that the bank has to maintain sufficient liquidity to 
meet any sudden demand for capital by these foreign portfolio 
investors. 
 
YOUNG