MACROECONOMICS
TAIWAN'S ECONOMY CONTINUES TO SHINE

CROSS-STRAIT RELATIONS
CONDOLEEZA RICE IN CHINA

DOMESTIC POLITICS
LAWMAKERS ASK U.S. FOR ARMS DISCOUNT 

GUNSHOT-INCIDENT PANEL PLANNED 
TYPHOON MINDULLE STRIKES TAIWAN

INTERNATIONAL
HIGH-LEVEL EUROPEAN VISITS

BUSINESS
MERCK TO OPEN NEW PLANT IN TAOYUAN 
IBM TO ESTABLISH SERVER DEVELOPMENT CENTER
FSC STRENGTHENS CORPORATE GOVERNANCE STANDARDS

MACROECONOMICS

TAIWAN'S ECONOMY CONTINUES TO SHINE
Despite rising oil prices and efforts by the Chinese government to cool its economy, the Taiwan Institute of Economic Research (TIER) predicts that manufacturing production in Taiwan as well as exports will continue to expand. TIER is therefore projecting that the island's economy will exceed the current 5% GDP growth forecast.
Agreement by the ruling and opposition parties on June 11 to pass a special bill for large public investment should help provide some economic stimulation. The program entails spending NT$500 billion over five years on "Ten Large Public Construction Projects." Although the period of loose monetary policy may be coming to an end, TIER believes that the global economic recovery will be sufficient to ensure the maintenance of steady growth.
Even though most signs are positive, TIER's May survey found that the proportion of manufacturing firms who perceived business as "good" for the upcoming six months declined from 46.4% in April to 41.1%. In addition, 51.1% of firms rated business as "fair," up from 46.6% a month earlier, while 7.8% described it as "bad," up from 7%.
The composite indicator, after being adjusted for seasonal factors and the moving average method, declined to 111.93 points in May from 114.71 points in April. TIER sees domestic political unrest and China's attempts to cool its economy as being behind the increase in pessimism, particularly among man-made fiber, rubber industry, and raw-material manufacturers.
TIER expects that unless international oil prices jump excessively, U.S. Federal Reserve Chairman Alan Greenspan will gradually raise rates to 2% by the end of the year and to between 3.5% and 4% in 2005. The institute sees Taiwan's Central Bank of China as maintaining loose monetary policies as long as possible in the absence of inflation. However, long-term bond yields have risen as the economy has recovered, and NT$35 billion in Central-Bank 10-year treasury notes came due in April at 2.934% interest. That was the largest sum in a year and a half.
While the U.S. economy remains strong, TIER thinks that with current-account and budget deficits hitting new records, the U.S. dollar is set to depreciate against the NT dollar over the course of the rest of the year.


CROSS-STRAIT RELATIONS

CONDOLEEZA RICE IN CHINA
U.S. National Security Advisor Condoleeza Rice visited China July 8-9 to discuss Taiwan, North Korea, and Iraq. Rice met with former PRC president Jiang Zemin, now head of China's Military Commission, who warned that China would not sit idly by if the United States were to back Taiwan independence. While Jiang said China prefers to see a peaceful settlement to the Taiwan issue, he warned against U.S. military intervention if China attacks the island after a formal declaration of Taiwan independence. Jiang also voiced his displeasure at continuing U.S. arms sales to Taiwan.

PROTESTERS ASSAIL A-MEI
Taiwanese pop star A-Mei canceled a concert in Hangzhou, China after protesters pressed for a boycott due to her "pro-independence" views. Previously, Coca-Cola Commercials featuring A-Mei were pulled from the air in China after the singer performed the national anthem at the inauguration of Taiwan President Chen Shui-bian in 2000.


DOMESTIC POLITICS
LAWMAKERS ASK U.S. FOR ARMS DISCOUNT
A bipartisan delegation of legislators led by Legislative Yuan speaker Wang Jin-pyng visited the United States for ten days in June to discuss the pending arms-procurement package worth NT$610.8 billion (US$18.23 billion). The group met with U.S. Deputy Secretary of Defense Paul Wolfowitz. An appropriations bill now before the Legislative Yuan, would cover the purchase of eight submarines, a modified version of the Patriot PAC-III anti-missile system, and a squadron of 12 P-3C anti-submarine aircraft -- items that U.S. president George W. Bush approved in 2001 for sale to Taiwan.
U.S. officials, concerned that China's ongoing military buildup could lead to a shift in the military balance in the Taiwan Strait, have been calling on Taiwan to take greater actions to buttress its defensive capabilities.
Legislators have questioned the preliminary pricetag of US$12.2 billion put on the submarines and the proposed 15-year delivery period. Wang said his delegation had asked the U.S. government to review the price and quicken the delivery date by three to five years.
A major bone of contention is the whether the domestic China Shipbuilding Corp. (CSBC) should participate in constructing the submarines, which even if feasible would add substantially to the cost. Wolfowitz reportedly told the visiting lawmakers that constructing the vessels in Taiwan would constitute a "waste of resources." Another option, considered more feasible, is to have CSBC handle maintenance and logistical support.
Meanwhile, a U.S. Congressional unit has recommended a review of Washington's "one China" policy stance. The U.S.-China Economic and Security Review Commission suggested on June 15 that numerous changes in the decades since that policy was first set warrant a re-evaluation of its continuing suitability.

GUNSHOT-INCIDENT PANEL PLANNED
Responding to repeated opposition calls for an independent investigation of the March 19 incident in which he was slightly wounded by gunfire while campaigning in southern Taiwan, President Chen has agreed to establish a special commission of inquiry to be headed by Control Yuan President Fredrick Chien. Political leaders from both the governing and opposition coalitions are examining how best to set up the panel so that it would have full legal authority.
The opposition alleges that the shooting incident, which occurred one day before the presidential election, caused a wave of sympathy for the president, shifting enough votes to give Chen a narrow victory of fewer than 30,000 votes. Chen's critics have suspected that the incident was somehow fabricated.
Investigators have established that a gunman fired two shots -- homemade bullets from a homemade gun -- as the president rode by in an open jeep. But no progress has been made in identifying the perpetrator.
Meanwhile the High Court has not yet ruled on opposition charges of voting irregularities in the presidential balloting, which led to a recount.

TYPHOON MINDULLE STRIKES TAIWAN
The number of people in Taiwan who died from floods and landslides as Typhoon Mindulle battered the island in early July rose to 18 with nine missing. The Central Weather Bureau reported 1,500 millimeters of rainfall during a three-day period. The typhoon is expected to cost the Taiwan Power Co. NT$10 billion (US$298.5 million) -- three hydraulic plants were submerged by floodwaters -- and agricultural authorities estimated damage to crops and livestock at NT$8 billion.


INTERNATIONAL
HIGH-LEVEL EUROPEAN VISITS
Foreign Minister Mark Chen traveled to Europe, his first overseas trip since assuming his post in April. Chen flew to Rome to preside over a meeting of the chiefs of Taiwan's diplomatic missions in the area. He also met with officials of the Vatican, the only sovereign state in Europe to grant Taiwan diplomatic recognition.
In addition, Lee Chin-lung, chairman of Taiwan's Council of Agriculture, represented the island democracy at the Group of 10 agriculture ministers' meeting in Geneva July 5. Members of the group include Bulgaria, Iceland, Israel, Japan, Liechtenstein, Mauritius, Norway, South Korea, Switzerland, and Taiwan.

U.S. SUPPORTS WHO OBSERVER STATUS
The U.S. government has announced that it fully supports the participation of Taiwan in the World Health Organization as an observer. President Bush signed legislation authorizing Secretary of State Colin Powell to initiate a plan to endorse and obtain observer status for Taiwan at the annual summit of the World Health Assembly.


BUSINESS
MERCK TO OPEN NEW PLANT IN TAOYUAN
Merck KGaA held a ground-breaking ceremony for a new plant in Taoyuan on June 25. The company is the largest supplier of liquid crystals in the world. The investment, worth NT$900 million (US$26.8 million), is part of the German company's push to further expand in Taiwan's booming flat-screen industry.
The investment involves an integrated manufacturing and R&D center for liquid crystals, and will handle sales and marketing as well. Demand for liquid crystals among local LCD-panel manufacturers, such as AU Optronics Corp., is rising fast. Taiwan is expected to push past South Korea to take the top spot for production of large screens by the third quarter of this year.
The plant is scheduled to open by the end of 2005 and by 2007, the company hopes to be the sole supplier of liquid crystals to local customers such as AU Optronics Corp. and Chi Mei Optoelectronics Corp. Merck Display says its local sales could double to NT$13 billion this year, further strengthening the company's No. 1 spot in Taiwan. The company has 69% of the global liquid-crystal market.

IBM TO ESTABLISH SERVER DEVELOPMENT CENTER
IBM Corp., the world's largest server vendor, announced that it would set up a server-development center in the Nankang Software Park in Taipei -- its first outside the United States. The new center will target high-volume Intel-based servers, with the first shipment expected by the end of this year.
The global server market is set to expand 5% this year to US$53 billion as corporate demand rebounds. Compound annual growth of 3.8% is predicted through 2008 to create a market worth US$60.8 billion. Meanwhile, Taiwan's server market is set to grow from US$211 million this year to US$327 million in 2008.
IBM currently has a leading market share of 29.7%, followed by HP and Sun Microsystems.

FSC STRENGTHENS CORPORATE GOVERNANCE STANDARDS
The newly established Financial Supervisory Commission has proposed revisions to the Securities Transaction Law and Accounting Law to discourage financial irregularities. If the law is enacted, beginning in January 2006 all listed companies must install independent directors, who must make up 25% of the seats on the board, to beef up corporate governance by monitoring management and financial performance.