MACROECONOMICS
BRACING FOR A SLOWER SECOND HALF

CROSS-STRAIT RELATIONS
ZERO OUT OF THREE SO FAR

DOMESTIC POLITICS
PASSPORT SCANDAL
DEBATE OVER MILITARY BUDGET HEATS UP
ANNETTE LU'S ABORIGINAL PROBLEM

INTERNATIONAL
SINGAPORE'S NEW LEADER PAYS A VISIT

BUSINESS
SOME PROGRESS ON TRADE

EVENT UNDERSCORES IPR COMMITMENT
BONDS DEFAULTED ON
REACTION TO WTO AGREEMENT 

MACROECONOMICS
BRACING FOR A SLOWER SECOND HALF
July saw upward revisions in several closely-followed forecasts for the year's GDP ¡V but it was a case of good news turning out on inspection to represent a bit of a muddle. On July 16, the Chung-Hua Institution for Economic Research raised its 2004 growth forecast to 5.35% from an April projection of 4.67% Days later, Academia Sinica pegged the number at 5.76%, up from last December's 4.35%. And the Taiwan Institute of Economic Research (TIER) predicted in its latest forecast that growth would amount to 5.67%, as compared to an earlier 5.08%. Problem is, growth in the second half is widely predicted to drop off from first-half levels, with TIER putting the second-half figure at 4.5% ¡V respectable, but not as inspiring as the 6.28% that was registered in the first quarter. So July's GDP revisions were due less to optimism about the immediate future than to expectations having been outperformed in the first half. Signs of a slowdown were already apparent in June, with the Council for Economic Planning and Development reporting that the index of leading indicators that month had fallen to 108.2, down 1.3 points from the previous month. This followed a Council warning in May that the economy was on the verge of overheating. Perhaps no warning was in order, because May's strong exports and healthy domestic demand had already started slowing by June due to increased oil prices, an expected (and subsequently delivered) rate hike by the Fed, China's efforts to cool down its economy, and a flattening ¡V though perhaps a temporary one ¡V in U.S. economic growth. A spate of Q2 earnings reports reinforced the notion that the local economy was in the midst of downshifting ¡V and the numbers, even when sanguine, had to be interpreted with the knowledge that last year's SARS-deflated second quarter was a poor basis for year-on-year calculations. Taiwan Semiconductor Manufacturing (TSMC) reported that its second-quarter earnings had almost doubled year-on-year ¡V but the Commercial Times said that TSMC and United Microelectronics were expected to face declining chip orders from some of their largest customers. AU Optronics and Chi Mei Optoelectronics found themselves in similar positions. Cathay Financial reported disappointing second-quarter earnings ¡V though its first quarter had been so strong that the company came close to meeting its 2004 earnings projection in not much more than half the year. The relative pessimism about the short-term economy is tempered by a consensus view that the global economy is fundamentally sound in the mid-term. The United States, though its GDP underperformed expectations in the second quarter, is generally thought to be on an expansionary course. The Japanese economy will continue to grow, according to TIER projections ¡V driven not by government expenditures but by exports, investment, and private spending. And help for Taiwan's businesses still might come from the government as well, if the Legislative Yuan ever manages to pass the "Ten Large Construction Projects" budget.

CROSS-STRAIT RELATIONS
ZERO OUT OF THREE SO FAR
In the wake of last month's trip to Beijing by U.S. National Security Adviser Condoleezza Rice, a new number-noun pairing has entered the cross-strait lexicon: "the three stops."
The three stops amount to Beijing's demand that Washington stop selling arms to Taiwan, stop participating in exchanges with Taiwan's leadership, and stop supporting membership for Taiwan in international organizations. China's position has now been spelled out not just to Rice but also to President George W. Bush and a delegation of visiting U.S. senators.
Amid much talk of heightened tensions across the Strait, the question is, as always, whether the United States has any intention of altering its longstanding policy of strategic ambiguity. The immediate answer, judging from statements by U.S. officials, would seem to be "no" ¡V though the U.S. rollout of increased naval power in the Pacific might indicate that the ambiguity will now be backed up with yet more force.
Meanwhile, the U.S. House of Representatives voted shortly after Rice's trip to affirm its commitment to the Taiwan Relations Act (TRA) ¡V though the newly adopted Democratic Party platform, unlike the 2000 version of the document, includes no such affirmation.
DOMESTIC POLITICS
PASSPORT SCANDAL
In March, Yeh Hsiu-chen walked into Taiwan's Representative Office in the United Kingdom to replace a lost passport and to apply for papers allowing a real-estate transfer in Taiwan. She got everything she asked for. Later, when it was discovered that Yeh was the wife of Andrew Wang ¡V who is wanted in Taiwan for suspected involvement in a crooked arms deal and the murder of a navy captain ¡V what had been a simple issuance of documents became a major scandal.
It wasn't the first such incident at the U.K. Representative Office. In February last year, Wang himself turned up at the London office and was given help obtaining a document. After the latest foul-up, it appeared that someone would have to pay with his or her job. That someone turned out to be Tien Hung-mao, whose resignation as Taiwan's representative to England was accepted by the Cabinet after he had been summoned to Taipei for questioning.
DEBATE OVER MILITARY BUDGET HEATS UP

As the military was carrying out its annual Hankuang No. 20 exercises in late July, a divisive legislative battle was shaping up regarding a NT$610.8 billion (US$18 billion) budget allocation for arms procurements from the United States. The Cabinet has already approved the measure and President Chen Shui-bian is lobbying for it intensely. But amid concerns about the price of the arms in question, legislative passage is by no means a certainty. On July 29, Chen found himself lobbying for the purchases in a submarine, having escorted more than 100 reporters to the seas off Tsoying to observe a military exercise. Chen took the opportunity to argue that submarines are the ideal weapon for Taiwan. But Legislative Speaker Wang Jin-pyng said that arms procurements should, in the special legislative sitting likely to occur this month, take a back seat to the government's response to Tropical Storm Mindulle. No one argued about the two Mirage 2000-5 jets that landed on the Sun Yat-sen Freeway as part of the military exercises: they looked pretty cool doing it.

ANNETTE LU'S ABORIGINAL PROBLEM

It was staggering damage ¡V for a storm that, by the time it reached Taiwan, didn't even qualify as a proper typhoon. At last count, Tropical Storm Mindulle had killed 29 people, with 12 more missing. The Executive Yuan had allocated NT$15.2 billion (US$447 million) for disaster relief. Moreover, old arguments about development in the mountains began to rage again, and that's when Vice President Annette Lu provoked a storm of a different sort by suggesting that residents of mountainous areas should consider moving to Central America and starting new careers. Lu's proposal failed to win many adherents among Aboriginals, and protests drawing thousands were soon under way on Ketagalan Boulevard. Despite the pressure, Lu stuck by her idea, though she eventually acknowledged that Aboriginals were indeed the original inhabitants of Taiwan. It was up to President Chen to try to smooth things over, though how well he succeeded may not be clear until voting patterns in this December's legislative elections are examined.

INTERNATIONAL
SINGAPORE'S NEW LEADER PAYS A VISIT
On July 13, it had been just days since Su Tseng-chang, secretary-general of the Presidential Office, had returned from a low-key trip to the Philippines. So it seemed for a moment that a diplomatic renaissance was under way when Lee Hsien Loong ¡V the Singaporean deputy prime minister who has since had "deputy" removed from his title ¡V visited Taipei. Though the visit was cast by all concerned as simply an opportunity for old friends to visit ¡V Lee's old friends include President Chen and KMT Chairman Lien Chan ¡V speculation was rampant that Lee, fresh off a trip to Beijing, might be carrying secret messages from the Chinese leadership.
If he was, all parties did an excellent job of disguising that fact, as Beijing reacted swiftly and sternly to what it saw as inappropriate diplomatic contact. A Chinese foreign ministry spokesman was quoted as saying that the visit "infringed China's core interest." Later there were indications that China-Singapore free-trade negotiations might be stopped in their tracks.

BUSINESS
SOME PROGRESS ON TRADE

Charles Freeman, assistant U.S. trade representative for China affairs, traveled to Taipei in July for the first substantial U.S.-Taiwan discussion of trade issues since October 2002. Progress on the trade front had hit a snag with U.S. concerns about access to Taiwan's markets and about intellectual property rights (IPR). But after Freeman had met with Ho Mei-yueh, Taiwan's minister of economic affairs, both sounded notes of cautious optimism. According to the Associated Press, Freeman said that Taiwanese officials had "over the past several months ¡K [shown a] genuine interest and willingness" to resolve longstanding points of contention between the two sides. In a briefing with members of the AmCham leadership, Freeman held out hope that his visit could be followed by even higher level contacts. He also said that Legislative Yuan passage of pending amendments to the Copyright Law could lead to a mid-term review of whether Taiwan should be dropped from the "Special 301 Priority Watch List" ¡V a designation for the worst IPR offenders.

EVENT UNDERSCORES IPR COMMITMENT
It was called a "press conference," though the attending reporters had no opportunity to ask any questions. Nevertheless, the event staged on August 5 by 10 leading business groups representing IPR holders' interests was more significant than many press gatherings. On stage, voicing the government's strengthened commitment to enforce IPR protection and rid Taiwan of the image of rampant piracy, were three Cabinet ministers ¡V Ho Mei-yueh of Economic Affairs, Su Chia-chuan of Interior, and Minister Without Portfolio Lin Yi-fuh ¡V plus Vice Justice Minister Yen Da-ho. Their joint participation demonstrated the increased coordination among government agencies in the anti-counterfeiting effort, as well as the authorities' desire to stimulate wider public understanding and support on the issue.
The sponsoring organizations were the Taiwan Association of Copyright Protection, Taiwan Intellectual Property Alliance, Business Software Alliance, Taiwan International Federation of the Phonographic Industry, Motion Picture Association, Taiwan Book Publishers Association, Information Service Industry Association, Chinese National Federation of Industries, Taipei Computer Association, and Kaohsiung Computer Association.

BONDS DEFAULTED ON
Trading suspended, executives detained, accountants sanctioned: recent events haven't instilled great confidence in holders of Taiwan's bonds. Defaults tend to have that effect.
First it was Procomp Informatics Ltd, which sought receivership in June just before NT$3 billion (US$88 million) in bonds came due. The company's request for court protection seemed exceedingly odd, considering that its balance sheet showed NT$6 billion in liquid assets. Prosecutors soon detained the chipmaker's founder, Yeh Su-fei, and the Financial Supervisory Commission barred KPMG Certified Public Accountants and Deloitte Touche Tohmatsu from certifying public companies' financial statements for two years.
The markets came alive with speculation about where the next failure would come from. A prime suspect was Cradle Technology, a workstation and server-equipment maker. The suspicions were borne out on July 28 when holders of NT$290 million (US$8.5 million) of the company's convertible bonds asked that the paper be redeemed rather than converted into stock. But Cradle had only NT$49 million (US$1.4 million) cash on hand, and all its efforts to arrange emergency loans came a day late and many dollars short.

REACTION TO WTO AGREEMENT
Last month's World Trade Organization meeting in Geneva produced what is being called the "July Package," a framework agreement that, though it lacks something in specificity, appears to have pulled the world trade body out of the abyss into which it fell last year in Cancun. From official statements, Taiwan would seem to have gotten some of what it wanted ¡V as well as some of what it didn't want. Lee Chin-lung, chairman of the Council of Agriculture, was quoted in the Taipei Times as saying "We think the pact will not pose an instant and negative danger to the nation's agriculture" ¡V leaving open the possibility of danger when the WTO manages to implement a more detailed package. July saw upward revisions in several closely-followed forecasts for the year's GDP ¡V but it was a case of good news turning out on inspection to represent a bit of a muddle. On July 16, the Chung-Hua Institution for Economic Research raised its 2004 growth forecast to 5.35% from an April projection of 4.67% Days later, Academia Sinica pegged the number at 5.76%, up from last December's 4.35%. And the Taiwan Institute of Economic Research (TIER) predicted in its latest forecast that growth would amount to 5.67%, as compared to an earlier 5.08%. Problem is, growth in the second half is widely predicted to drop off from first-half levels, with TIER putting the second-half figure at 4.5% ¡V respectable, but not as inspiring as the 6.28% that was registered in the first quarter. So July's GDP revisions were due less to optimism about the immediate future than to expectations having been outperformed in the first half. Signs of a slowdown were already apparent in June, with the Council for Economic Planning and Development reporting that the index of leading indicators that month had fallen to 108.2, down 1.3 points from the previous month. This followed a Council warning in May that the economy was on the verge of overheating. Perhaps no warning was in order, because May's strong exports and healthy domestic demand had already started slowing by June due to increased oil prices, an expected (and subsequently delivered) rate hike by the Fed, China's efforts to cool down its economy, and a flattening ¡V though perhaps a temporary one ¡V in U.S. economic growth. A spate of Q2 earnings reports reinforced the notion that the local economy was in the midst of downshifting ¡V and the numbers, even when sanguine, had to be interpreted with the knowledge that last year's SARS-deflated second quarter was a poor basis for year-on-year calculations. Taiwan Semiconductor Manufacturing (TSMC) reported that its second-quarter earnings had almost doubled year-on-year ¡V but the Commercial Times said that TSMC and United Microelectronics were expected to face declining chip orders from some of their largest customers. AU Optronics and Chi Mei Optoelectronics found themselves in similar positions. Cathay Financial reported disappointing second-quarter earnings ¡V though its first quarter had been so strong that the company came close to meeting its 2004 earnings projection in not much more than half the year. The relative pessimism about the short-term economy is tempered by a consensus view that the global economy is fundamentally sound in the mid-term. The United States, though its GDP underperformed expectations in the second quarter, is generally thought to be on an expansionary course. The Japanese economy will continue to grow, according to TIER projections ¡V driven not by government expenditures but by exports, investment, and private spending. And help for Taiwan's businesses still might come from the government as well, if the Legislative Yuan ever manages to pass the "Ten Large Construction Projects" budget.

CROSS-STRAIT RELATIONS
ZERO OUT OF THREE SO FAR
In the wake of last month's trip to Beijing by U.S. National Security Adviser Condoleezza Rice, a new number-noun pairing has entered the cross-strait lexicon: "the three stops."
The three stops amount to Beijing's demand that Washington stop selling arms to Taiwan, stop participating in exchanges with Taiwan's leadership, and stop supporting membership for Taiwan in international organizations. China's position has now been spelled out not just to Rice but also to President George W. Bush and a delegation of visiting U.S. senators.
Amid much talk of heightened tensions across the Strait, the question is, as always, whether the United States has any intention of altering its longstanding policy of strategic ambiguity. The immediate answer, judging from statements by U.S. officials, would seem to be "no" ¡V though the U.S. rollout of increased naval power in the Pacific might indicate that the ambiguity will now be backed up with yet more force.
Meanwhile, the U.S. House of Representatives voted shortly after Rice's trip to affirm its commitment to the Taiwan Relations Act (TRA) ¡V though the newly adopted Democratic Party platform, unlike the 2000 version of the document, includes no such affirmation.

DOMESTIC POLITICS
PASSPORT SCANDAL
In March, Yeh Hsiu-chen walked into Taiwan's Representative Office in the United Kingdom to replace a lost passport and to apply for papers allowing a real-estate transfer in Taiwan. She got everything she asked for. Later, when it was discovered that Yeh was the wife of Andrew Wang ¡V who is wanted in Taiwan for suspected involvement in a crooked arms deal and the murder of a navy captain ¡V what had been a simple issuance of documents became a major scandal.
It wasn't the first such incident at the U.K. Representative Office. In February last year, Wang himself turned up at the London office and was given help obtaining a document. After the latest foul-up, it appeared that someone would have to pay with his or her job. That someone turned out to be Tien Hung-mao, whose resignation as Taiwan's representative to England was accepted by the Cabinet after he had been summoned to Taipei for questioning.

DEBATE OVER MILITARY BUDGET HEATS UP

 As the military was carrying out its annual Hankuang No. 20 exercises in late July, a divisive legislative battle was shaping up regarding a NT$610.8 billion (US$18 billion) budget allocation for arms procurements from the United States. The Cabinet has already approved the measure and President Chen Shui-bian is lobbying for it intensely. But amid concerns about the price of the arms in question, legislative passage is by no means a certainty. On July 29, Chen found himself lobbying for the purchases in a submarine, having escorted more than 100 reporters to the seas off Tsoying to observe a military exercise. Chen took the opportunity to argue that submarines are the ideal weapon for Taiwan. But Legislative Speaker Wang Jin-pyng said that arms procurements should, in the special legislative sitting likely to occur this month, take a back seat to the government's response to Tropical Storm Mindulle. No one argued about the two Mirage 2000-5 jets that landed on the Sun Yat-sen Freeway as part of the military exercises: they looked pretty cool doing it.

ANNETTE LU'S ABORIGINAL PROBLEM

 It was staggering damage ¡V for a storm that, by the time it reached Taiwan, didn't even qualify as a proper typhoon. At last count, Tropical Storm Mindulle had killed 29 people, with 12 more missing. The Executive Yuan had allocated NT$15.2 billion (US$447 million) for disaster relief. Moreover, old arguments about development in the mountains began to rage again, and that's when Vice President Annette Lu provoked a storm of a different sort by suggesting that residents of mountainous areas should consider moving to Central America and starting new careers. Lu's proposal failed to win many adherents among Aboriginals, and protests drawing thousands were soon under way on Ketagalan Boulevard. Despite the pressure, Lu stuck by her idea, though she eventually acknowledged that Aboriginals were indeed the original inhabitants of Taiwan. It was up to President Chen to try to smooth things over, though how well he succeeded may not be clear until voting patterns in this December's legislative elections are examined.

INTERNATIONAL
SINGAPORE'S NEW LEADER PAYS A VISIT
On July 13, it had been just days since Su Tseng-chang, secretary-general of the Presidential Office, had returned from a low-key trip to the Philippines. So it seemed for a moment that a diplomatic renaissance was under way when Lee Hsien Loong ¡V the Singaporean deputy prime minister who has since had "deputy" removed from his title ¡V visited Taipei. Though the visit was cast by all concerned as simply an opportunity for old friends to visit ¡V Lee's old friends include President Chen and KMT Chairman Lien Chan ¡V speculation was rampant that Lee, fresh off a trip to Beijing, might be carrying secret messages from the Chinese leadership.
If he was, all parties did an excellent job of disguising that fact, as Beijing reacted swiftly and sternly to what it saw as inappropriate diplomatic contact. A Chinese foreign ministry spokesman was quoted as saying that the visit "infringed China's core interest." Later there were indications that China-Singapore free-trade negotiations might be stopped in their tracks.

BUSINESS
SOME PROGRESS ON TRADE

Charles Freeman, assistant U.S. trade representative for China affairs, traveled to Taipei in July for the first substantial U.S.-Taiwan discussion of trade issues since October 2002. Progress on the trade front had hit a snag with U.S. concerns about access to Taiwan's markets and about intellectual property rights (IPR). But after Freeman had met with Ho Mei-yueh, Taiwan's minister of economic affairs, both sounded notes of cautious optimism. According to the Associated Press, Freeman said that Taiwanese officials had "over the past several months ¡K [shown a] genuine interest and willingness" to resolve longstanding points of contention between the two sides. In a briefing with members of the AmCham leadership, Freeman held out hope that his visit could be followed by even higher level contacts. He also said that Legislative Yuan passage of pending amendments to the Copyright Law could lead to a mid-term review of whether Taiwan should be dropped from the "Special 301 Priority Watch List" ¡V a designation for the worst IPR offenders.

EVENT UNDERSCORES IPR COMMITMENT
It was called a "press conference," though the attending reporters had no opportunity to ask any questions. Nevertheless, the event staged on August 5 by 10 leading business groups representing IPR holders' interests was more significant than many press gatherings. On stage, voicing the government's strengthened commitment to enforce IPR protection and rid Taiwan of the image of rampant piracy, were three Cabinet ministers ¡V Ho Mei-yueh of Economic Affairs, Su Chia-chuan of Interior, and Minister Without Portfolio Lin Yi-fuh ¡V plus Vice Justice Minister Yen Da-ho. Their joint participation demonstrated the increased coordination among government agencies in the anti-counterfeiting effort, as well as the authorities' desire to stimulate wider public understanding and support on the issue.
The sponsoring organizations were the Taiwan Association of Copyright Protection, Taiwan Intellectual Property Alliance, Business Software Alliance, Taiwan International Federation of the Phonographic Industry, Motion Picture Association, Taiwan Book Publishers Association, Information Service Industry Association, Chinese National Federation of Industries, Taipei Computer Association, and Kaohsiung Computer Association.

BONDS DEFAULTED ON
Trading suspended, executives detained, accountants sanctioned: recent events haven't instilled great confidence in holders of Taiwan's bonds. Defaults tend to have that effect.
First it was Procomp Informatics Ltd, which sought receivership in June just before NT$3 billion (US$88 million) in bonds came due. The company's request for court protection seemed exceedingly odd, considering that its balance sheet showed NT$6 billion in liquid assets. Prosecutors soon detained the chipmaker's founder, Yeh Su-fei, and the Financial Supervisory Commission barred KPMG Certified Public Accountants and Deloitte Touche Tohmatsu from certifying public companies' financial statements for two years.
The markets came alive with speculation about where the next failure would come from. A prime suspect was Cradle Technology, a workstation and server-equipment maker. The suspicions were borne out on July 28 when holders of NT$290 million (US$8.5 million) of the company's convertible bonds asked that the paper be redeemed rather than converted into stock. But Cradle had only NT$49 million (US$1.4 million) cash on hand, and all its efforts to arrange emergency loans came a day late and many dollars short.

REACTION TO WTO AGREEMENT
Last month's World Trade Organization meeting in Geneva produced what is being called the "July Package," a framework agreement that, though it lacks something in specificity, appears to have pulled the world trade body out of the abyss into which it fell last year in Cancun. From official statements, Taiwan would seem to have gotten some of what it wanted ¡V as well as some of what it didn't want. Lee Chin-lung, chairman of the Council of Agriculture, was quoted in the Taipei Times as saying "We think the pact will not pose an instant and negative danger to the nation's agriculture" ¡V leaving open the possibility of danger when the WTO manages to implement a more detailed package.