US embassy cable - 05TAIPEI3289

C O N F I D E N T I A L SECTION 01 OF 02 TAIPEI 003289 
 
SIPDIS 
 
DEPT PASS TO AIT/W AND USTR 
DEPT FOR EAP/TC, EAP/EP AND EB/IFD/OIA 
TREASURY FOR OASIA ZELIKOW,WISNER AND OCC AMCMAHON 
TREASURY ALSO PASS TO FEDERAL RESERVE BOARD OF GOVERNORS, 
SAN FRANCISO FRB AND NEW YORK FRB 
 
E.O. 12958: DECL: 07/08/2020 
TAGS: ECON, EFIN, PINR, PREL, TW, Finance, Foreign Policy 
SUBJECT: TAIWAN ECONOMIC BRIEF JULY 2005 
 
Classified By: AIT DIRECTOR DOUGLAS PAAL, REASON 1.5 B/D 
 
1.  (U) This cable summarizes selected recent economic events 
in Taiwan in May 2005: 
 
-- Economic Growth 
 
-- Tax Reform 
 
-- China's Lenovo Breaks Taiwan Barrier 
 
-- High-speed Rail 
 
-- Boeing Delivers New Aircraft to EVA 
 
Think Tanks Lower Economic Growth Estimated for 2005 
--------------------------------------------- ------- 
 
2.  (U) The Taiwan Institute of Economic Research (TIER) 
reduced Taiwan's estimated growth rate to 3.3% from the 4.4% 
estimated in April.  TIER attributed the downward adjustment 
mainly to lower than expected export growth in the first half 
of 2005.  The Chunghua Institution for Economic Research 
(CIER) cut its estimate of the growth rate to 3.8% from 4.1% 
predicted in April.  CIER blamed inventory reduction and 
industry emigration.  Industrial relocation contributed to a 
new low for the past two years in Q2 y-o-y export growth, 
declines in manufacturing production in Q1 and Q2, and low 
private investment growth.  Higher produce prices and higher 
energy costs are building inflationary pressure, but these 
are partly offset by stable prices for other goods and 
services.  School graduates joining the labor market drove up 
the unemployment rate slightly. 
 
Alternate Minimum Tax 
--------------------- 
 
3.  (U) In late July 2005, the Ministry of Finance (MOF) 
ended a three-month interagency conference on the proposed 
alternate minimum tax system, an important part of Taiwan's 
tax reform.  Despite industry calls to reduce the rate from 
10% to 7.5%, the proposed minimum tax for businesses is 10%. 
For individuals earning at least NT$10 million before taxes, 
the proposed minimum tax is 20%.  The alternate minimum tax 
proposal has cause grave concern to U.S. investors that 
Taiwan may renege its earlier commitment of tax incentives. 
 
4.  (C) Hong Chi-chang, a senior DPP legislator, told AIT 
that President Chen told a small group of senior legislators 
and officials that he would not cave to business pressure on 
this.  He said he would be willing to consider reducing the 
alternative tax rate in LY caucus negotiations with the KMT 
if necessary to pass the legislation. 
 
Lenovo Investment Will Break Barrier on PRC Investment 
--------------------------------------------- --------- 
 
5.  (U) On July 19, Mainland Affairs Council (MAC) Chairman 
Joseph Wu announced that MAC had approved PRC PC manufacturer 
Lenovo's plan to acquire with Taiwan's IBM PC division via 
its Dutch subsidiary.  Taiwan's Executive Yuan will also have 
to approve the plan.  This is the first case of Taiwan 
government approval of Mainland investment in Taiwan.  MAC 
Economic Department Director Fu Don-cheng told AIT/T that the 
Lenovo case would not become a model for Mainland firms to 
invest in Taiwan.  According to Fu, all such investment 
proposals will be assessed on a case-by-case basis.  However, 
the fact that Taiwan is willing to consider such applications 
at all marks a shift in Taiwan's posture toward PRC 
investment, made easier by the cover provided by the IBM 
acquisition. 
 
Further Delays for High-Speed Rail? 
----------------------------------- 
 
6.  (U) On July 23, Japanese media reported that it is likely 
that the inauguration of Taiwan's high-speed rail would be 
postponed beyond the October 2005 target due to construction 
delays for the electronic core systems.  As of July 23, these 
systems were only 60 percent complete.  The Taiwan High-Speed 
Rail Corporation (THSRC) denied all rumors of delay and 
reconfirmed that the system would begin operations in October 
as planned.  Furthermore, on July 22, THSRC Assistant Vice 
President Ted Chia told the Taipei Times that the company 
expected to raise NT$ 5.5 billion (USD 171 million) of 
capital by July 31 and an additional NT$ 2 billion (USD 63 
million) by the end of September.  THSRC has repeatedly had 
trouble meeting its financing targets and has had to revise 
its financing plan at least 11 times. 
Boeing Delivers to EVA Air 
---------------------------- 
 
7. (U) On July 29, Taiwan's EVA Airways celebrated the 
delivery of the airline's first of 15 Boeing 777-300ER 
(Extended Range) aircraft.  EVA Chairman Steve Lin and 
President K.W. Chang presided over a ceremony attended by 
Boeing Vice President for Sales Larry Dickenson and AIT/T 
Economic and Commercial sections.  Chairman Lin told AIT the 
new plane offers significant savings in fuel costs over any 
other type of plane available. 
PAAL