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NEW CHINA POLICYNEW CHINA POLICY
A Turning Point ForTAIWANs ECONOMY
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IN THE LAST DECADE. . .
Emerging China
Chinas low production costs
disadvantaged Taiwan production
Large amount ofinvestments and
employment had moved from
Taiwan to China
Unstable Cross-strait Relationship
No direct flight Taiwan lost
geographical advantages
Prohibiting capital inflow from China
created an economic disequilibrium
between Taiwan and China
Taiwan lost much of its
economic/strategic advantages
Consumption decreasedand
Taiwans economy weakenedDepreciation of financial assets
+Economic Turmoil = EmergingChina Unstable Cross-straightRelationship
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Unemployment Rate Rises After 2000
After 2000, China replaced Taiwan production due to Chinas
lower production costs, which impacted Taiwans labor market
Data Source : Directorate-General of Budget, Accounting and Statistics
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%
Year
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Private consumption accounted for 60.39% of GDP in 2000 and
shrankto 54.5% in 2008
GDP Breakdown (2000 vs. 2008)
Data Source : Directorate-General of Budget, Accounting and Statistics
Change in Taiwans GDP Structure
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Higher Degree of Trade Dependence
The degree of Taiwans dependence on trade increased from 100% in 1981to 144% in 2008
Data Source : Directorate-General of Budget, Accounting and Statistics
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Higher degree of trade dependence
Higher risks when global economies are negatively affected
Year
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Taiwans Real Trade Surplus to GDP ratio achieved a high level of17%
Trade surplus helped accumulate a large FX reserve
Taiwan was rankedTop 5 worldwide in FX Reserve Size
FX Reserve Accumulated Rapidly
Data Source : Directorate-General of Budget, Accounting and Statistics
Ranking Source : Bloomberg, Sept 09 - Page 5 -
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Taiwans economic growth shows more volatilityin comparison to the World
Taiwans Susceptibility to Changes in World
Economy
Data Source : IMF
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%GDPGrowthRate
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The Four Asian tigers, who are export-oriented economies, showed rapid economic growthfrom 1980-2000
Taiwan lost its economic/strategic advantages as its relations with China weakened
Taiwans Average GDP growth fell to last place during 2000 - 2008.
Taiwanese investments in China were restricted to 40% of a company's asset value
Data Source : IMF
Proactive Management Policy in 2000-2008
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%G
DPGrowthRate
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2000 2007 Shows Astonishing Cash Outflow
From 2000-2007, financial account showed 40.8Bn/USD net capital outflow
After deducting approximately114.7 Bn/USD in foreign capital inflow
Taiwans total capital outflow is estimated to be 156.25Bn/USD
Capital outflow from Taiwan to China is estimated to be 125Bn/USD(80%)
Data Source: Central Bank, 2009/8
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USDMillion
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ECFA cooperation is expected to be sign in the first half of 2010
TAIWAN2008/7 - Permitting Chinese tourists to Taiwan
- Raised max level of investments to
China for Listed Company
- Opened the exchange of RMB/TWD
2008/9 - Three small links normalization
2008/12 - Three linkages
2009/4 - Opening QDII
2009/5 - Chartered Flight to Regular Flight
2009/6 - Opening 192 items for China capital
CHINA2009/5 - Development of western economy zone
2009/5/29 - China Trade Mission 1 to Taiwan
2009/6/1 - Color TV purchasing Group
2009/6/8 - LED purchasing Group
2009/7/13 - China Trade Mission 2 to Taiwan
2009/8/19 - China Trade Mission 3 to Taiwan
2008 Presidential ElectionParty Platform Change Opening-Up Policy
MOU for finance cooperation is expected to be signed at the end of 2009
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Members ofASEAN+3 FTA will be exempt from tariffs
on most merchandises in 2010 and ECFA will help
enhance competitiveness
Item ContentMerchandiseTrade
Bilateral exempt of tariffs Increase in import items
Service Trade Agreement of service trade
Investment Investment liberalization Opening-up bilateral investment
Other Protection of intellectual property rights Cooperation of customs
Avoidance of double-taxation agreement
The Content of ECFA
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What We Have Seen So Far
STRONG GROWTH SUPPORTfrom China
RETURN OF CAPITAL from overseas
OUTPERFORMANCEofequity market
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Strong Growth Support From China [1]
Strong orders from China have offset the decrease in demand from
developed countries
Export orders from China have turned to positive annual growth
Taiwan Export Orders come from (YoY)
Source: Bloomberg
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Year
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Strong Growth Support From China [2]
Tourists and direct investments from China should help boost TWs private
demand
Assuming tourists from China reach 3000 limit daily . . .
0.6% - 0.7% GDP growth per year could be generated
Retail sales show positive annual growth since July
Data Source: TEJ
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Year
#ofChineseTourists
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Return of Capital From Overseas
Capital from overseas expected to return due to reduction in inheritance
taxfrom 50% 10% Such capital inflow should provide sufficient liquidity for capital market
USD/MnUSD/Mn
Data Source: Central Bank of Republic of China
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TAIEX Outperformance Vs. Major Indices
Continual improvements in cross-straight relations and capital inflow
RESULT?
TAIEX outperforms - from beginning of 2009
M arket Index(2009/9/30) YTDTSE 7 ,509 63 .56%Dow Jones 9,712 10.66%NASDAQ 2,122 34.58%S&P 500 1,057 17.03%Shanghai A-Share 2,916 52.57%Hang Seng 20,955 45.65%Nikkei 225 10,133 14.38%KOSPI 1,673 48.79%DAX 5,675 17.98%FTSE 5,133 15.78%
Data Source: TEJ
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What We Expect for Taiwans Future . . .
Consumption to increase
Rerating of equity market
New milestones for Taiwans property market
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ECFA Helps International Trade
Exports to China accounted for 44% of Taiwan exports
There are 230 FTAs in the world and if membership is achieved,Taiwans trade ability will be at an advantage
CIER estimates that Taiwans GDP will increase 1.65%
Weights of TW Export - 2009/8Weights of TW Export - 2000
Data Source : TEJ
CIER: Chung-hua Institute for Economic Research, Taipei - Page 18 -
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ECFA Will Boost Taiwans Domestic Consumption
CEPA was signed on06/2003 and formallyimplemented in 2004
HK shows strong
private consumptiongrowth after CEPA
Taking HKs experience
We expectTW privateconsumption toincrease after ECFA
CEPA
Data Source : Bloomberg
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Re-rating of TAIEX
During 1994 & 2000
PBR of TAIEX traded between 2.5X - 4.0X
Post internet bubble and cross-strait tension
PBR of TAIEX traded between 1.2X - 2.0X
Due to improvements in cross-strait relations
We expect the PBR ratio to trade higher up to 3.0X.
Data Source: TEJ
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Money Supply Benefits Property Demand
-15
-10
-5
0
5
10
15
20
25
30
0
100
200
300
400
500
600
700
800
900
1991
1991
1993
1995
1996
1998
1998
2000
2002
2003
2005
2007
2007
2009
TSE Construction Subindex M1b YOY%
The increase in growth rate ofTaiwans money supply M1B is
beneficial to property stock
Record low interest rates drive money into the property market
Source: Central bank of Republic of China (Taiwan)
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Index
M1BGrowthRate
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New Regulations for Chinese Investment:
Taiwans Property Market
The holding period on residential property investments should be
no less than three years
Taiwan-registered Chinese corporations can own commercial
property for purposes restricted to own-use only (no reselling)
Initial investments are expected to flow into the commercial
property market
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The Hong Kong Experience [1]
Regional
HeadquartersRegional office Local office Total New add.
2001 70 172 160 402
2002 96 170 290 556 154
2003 84 148 307 539 -17
2004 106 156 373 635 962005 107 160 443 710 75
2006 112 156 449 717 7
2007 93 152 480 725 8
2008 95 128 499 722 -3
~2009/9 96 127 527 750 28
Mainland China Companies in Hong Kong
Source: Hong Kong Census Statistics Department
Chinese companies that applied for branches in HK showed peaked growth in 2005
HKs commercial property demand has increased
Initial positive change in capital inflow helped boost domestic confidence
Since CEPA
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Housing Investment as Percentage of GDP
Residentialand non-residential property investment
3.7% of GDP since 2000
Taipei office rental rates are among the lowest in Asia
US$/m2/annum
Tokyo 1698.5
Hong Kong 1400.9
Mumbai 941.6
Singapore 936.8
Ho Chi Minh City 687.6
Shanghai(Pudong) 428.7
Beijing 335
Taipei 275.5
Seoul 258.7
Bangkok 250.2
Manila 249.5
Bangalore 228.7
Jakarta 95.8
Taipei Office Rental Rates
Taiwan
Source: GGBAS ,CLSA ASIA-Pacific Markets
Taiwan Property is Lagging in Asia
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Can ALL of This LAST?
Geographical advantages Near the world productioncenter & biggest market: China
Taiwans industrial competitive advantage
High quality human resources
Intellectual property management and protection measures
Excellent R&D environment and output
Freedom of speech and information
To be the center of research and development
Taiwans STRENGTHS
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Taiwan: Geographical Advantages
Located at the heart of the Asia-Pacific region
Links NE Asia & SE Asia from its position off the SE cost of China
which it shares both language and cultural ties
Direct cross-straight flights have been extended to 7 days a week
Compared to HK , Shanghai, and Singapore:
Taiwan enjoys the shortest average sailing times to 5 major Asia-
Pacific harbors Shortest average flying time to 7 major cities in Western Pacific
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Taiwan has the freest media environment in East Asia due to its:
Open legal environment
Economic freedom
Highly competitive media market
FREEDOM of Speech | Media | Information
SOURCE: Freedom House
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Map of Freedom 2009
Establishing R&D CENTERS in Taiwan
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Company Name Project NameHewlett-Packard International Pte. Ltd. Taiwan Branch HP product Development Center
Sony Taiwan Limited SONY Design & Engineering Center Taiwan
Sony Taiwan Limited System in Module Center Taiwan
Becker Electronic Taiwan Ltd. (Becker Avionics) Avionics Certification Skill & Key Technology Development Center
Aixtron Taiwan Co., Ltd. Manufacturing Oriented Research Lab
IBM Taiwan Corporation Mobile e-Business R&D Center
Pericom Taiwan Limited PERICOM Advanced Mixed-Signal IC R&D Center
Dell Computer (Taiwan) B.V., Taiwan Branch Dell Taiwan Design Center
IBM Taiwan Corporation Life Sciences Center of Excellence
Establishing R&D CENTERS in Taiwan CURRENT IMPLEMENTATION
TAIWAN Ideal location for multinationals to establish bases for innovative R&D activities
Leading multinationals (HP, Sony, Dell, IBM, Intel etc.) have already established 40R&D centers in Taiwan by September, 2009
TWs industrial environment & infrastructure exceeded expectations Some even
expanded the scale of their R&D centers
Introduction of key technology by these R&D centers will help mold Taiwan into avalued partner to the worlds multinational corporations in the area of technology
This will furtheradvance the development of Taiwanese industries
Approved projects of the Multinational Innovative R&D centers in Taiwan Program
Cont.
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Microsoft Taiwan Co. Microsoft Technology Center
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Dow Chemical Taiwan Limited Dow Chemical Taiwan Plastics Application Development Center
Fujitsu Taiwan Ltd. Fujitsu Taiwan Development Center
ULVAC Research Center Taiwan, Inc. ULVAC Advanced Technology Center
IBM Taiwan Corporation IBM Taiwan Systems and Technology Laboratory
ASML Taiwan Ltd. ASML Worldwide Center of Excellence
Mycom International Inc., Taiwan Branch Mycom strategic R&D center
Synopsys Taiwan Limited. Advanced Process EDA R&D Center
Taiwan International Standard Electronics Ltd. (Alcatel-Lucent)
WiMAX Application Development and IOT Center
Microsoft Taiwan Co. Microsoft Innovation Center
Telcordia Applied Research Center Taiwan Company Telcordia Telematics Taiwan R&D Center
DuPont Taiwan Ltd. DuPont Taiwan Display Materials Technical Center
Sony Computer Entertainment Taiwan Ltd. Digital Content Creation Center
Underwriters Laboratories Taiwan Co., Ltd. Advanced Energy Safety R&D Center
DuPont Taiwan Ltd. DuPont Taiwan Photovoltaic Materials Technical Center
Intel Innovation Technologies Ltd. Intel Innovation Center
Ericsson Taiwan Ltd. ERICSSON Innovation Center
Broadcom Taiwan Co. Network SoC R&D Center
Motorola Electronics Taiwan Limited Motorola Taiwan Product Development Center
DuPont Taiwan Ltd. DuPont Taiwan Technical Center
Taiwan International Standard Electronics Ltd. (Alcatel) Alcatel ICT Application Research Center
GlaxoSmithKline Far East B. V. Taiwan Branch GSK Taiwan R&D Operation Center
IBM Taiwan Corporation IBM xSeries Taiwan Development CenterNEC Taiwan Ltd. NEC Innovative Product Joint Development Center for Engineering
Synopsys Taiwan Limited. VDSM EDA R&D CENTER
AKT America, Inc. AKT Asia Research & Development Center
Festo Co., Ltd. Festo CEC R&D Center Taiwan
Atotech Taiwan Ltd. Atotech Technology R&D Center
Telcordia Technologies, Inc. Taiwan Telcordia R&D Center
General Instrument of Taiwan, Ltd. Motorola Connected Home Solutions Taiwan Technology Center
Underwriters Laboratories Taiwan Co., Ltd.Green Electronic Materials and Energy Device Safety Testing and
Inspection Technology Research and Development Center
Source:Depart
mentofIndustrialTechnologyMinistryofEconomic
Affairs- Page 30 -
Establishing R&D CENTERS in Taiwan
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Tax deduction and exemption
Tax credit up to 30% of amount invested in R&D against business income tax
payable
Human resource support
Companies may recruit overseas
Subsidy for operating capital
Salaries of local R&D personnel, consultant fees, remunerations of overseas
R&D personnel, travel expenses, rent, overseas training expenses and more
Priority in administrative procedure
Simplified administrative procedure, assistance for multinationals in
negotiation with government agencies
Establishing R&D CENTERS in Taiwan INCENTIVES
Source: Department of Industrial TechnologyMinistry of Economic Affairs - Page 31 -
World Competitiveness Ranking TAIWAN
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World Competitiveness Ranking TAIWAN[2009 2010]
Number of utility patent (i.e., patents for invention) [1st]
Availability of scientists and engineers [7th]
Government procurement of advanced tech products [7th]
State of cluster development [6th]
Venture capital availability [8th]
Financing through local equity market [5th]
Pay and productivity [3rd]
Flexibility of wage determination [10th]
Source: World Economics Forum http://gcr.weforum.org/ - Page 32 -
Taiwan known for its high-tech industry
Taiwan gets fully rewarded for outstanding capacity to innovate [6th]
Di l i
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