Taiwan Will Allow LCD, Chip Investments in China

Taiwan will end a ban on domestic companies building liquid-crystal-display factories in China and allow chipmakers to invest in their Chinese peers, as long as they spend more locally and keep their best technology at home.

Flat-panel and chip makers will be allowed to invest in manufacturing facilities in China provided they already use more-advanced technology in Taiwan, Minister of Economic Affairs Shih Yen-Shiang said at a press conference today in Taipei. The new rules will be effective “within days,” he said.

Easing of rules would allow AU Optronics Corp., Chi Mei Optoelectronics Corp. and Innolux Display Corp. to compete with South Korea’s Samsung Electronics Co. and LG Display Co. by manufacturing panels closer to their customers in China. Taiwan Semiconductor Manufacturing Co., the largest custom-chip maker, and AU plan to take advantage of the new rules, they said today.

“The growth driver for the LCD industry is televisions, so the key will be larger factories,” said Richard Ko, who rates AU “outperform” at Jih Sun Securities Ltd. in Taipei. “If the LCD industry is healthy this year then it will be beneficial to those who go first, but if the industry isn’t as healthy as expected, first movers may face bigger risks in building more capacity in China.”

Innolux added 0.6 percent to close at NT$50.60 in Taipei, AU advanced 0.3 percent to NT$36.30 and Chi Mei was unchanged at NT$24.05. The benchmark Taiex index rose 1.1 percent.

Panel makers can start a combined total of three LCD factories of sixth generation or above in China, as long as the applicant already has a plant in Taiwan that’s at least one generation ahead, the ministry said in a statement. There’ll be no restrictions on facilities below sixth generation, it said.

Chipmakers can apply to invest in or build factories in China that are two generations less advanced than those already on the island, it said.

Benefit Taiwanese Companies

Taiwan Semiconductor, which currently operates a plant near Shanghai that produces chips on 8-inch wafers, plans to upgrade the facility to 0.13 micron technology from 0.18 micron, JH Tzeng, spokesman for the Hsinchu-based company, said by phone after the announcement. Taiwan Semiconductor operates more- advanced 12-inch factories in Taiwan.

Chipmakers remain limited to building plants in China that can make 8-inch wafers or less, the ministry said.

The new rules will pave the way for Taiwan Semiconductor to use technology as advanced as 90 nanometers in China, Woody Duh director general of the economic ministry’s industrial development bureau said. Taiwan companies were previously restricted to 180 nanometers, or 0.18 micron, the ministry said.

AU, based in Hsinchu and currently Taiwan’s largest LCD maker, operates a 7.5-generation factory in Taichung, Taiwan and is building an 8.5-generation plant that can make panels the size of a pool table. The later generations enable makers to supply larger screens more efficiently for use in televisions.

“The move will increase the competence of Taiwan panel industry,” AU said in a statement after the government’s announcement. The new rules will help shorten the company’s shipment cycle and facilitate on-site services in China.

Building Advanced Plants

Chi Mei, which plans to merge with Innolux next month to overtake AU in Taiwan, is also building an 8.5-generation plant in Kaohsiung, southern Taiwan.

“If Taiwan doesn’t invest in China, we may lag behind and lose our competitive advantage,” Taiwan Premier Wu Den-yih said Dec. 8.

Taiwan maintains restrictions on the value and type of investments it allows its companies to have in China, with advanced chip-making and the manufacture of ethylene among those currently banned, to prevent strategic technologies from migrating to the mainland.

China is Taiwan’s largest export market and regards the independently governed island as part of its territory, threatening to attack if it declares formal independence. The two sides split 60 years ago after Mao Zedong’s communists took control of China, forcing the Kuomintang to retreat to Taiwan.

Suwon, Korea-based Samsung, the world’s largest LCD maker, said Oct. 16 it will spend 2.6 trillion won ($2.2 billion) to build a 7.5-generation panel factory in China. Two days earlier, Seoul-based LG Display, the second-biggest, said it will form a $4 billion venture for an 8th-generation LCD plant in Guangzhou.

Chinese economic growth

China's top leaders pledged Friday to continue focusing on economic recovery next year and to maintain a basically accommodative policy stance, a statement that will likely reassure domestic businesses and financial markets that it supports continued growth.

The assurance comes amid growing calls from economists for Beijing to start scaling back its moderately loose monetary policy as the economy has staged a robust rebound.

While saying it will continue its monetary policy stance and active fiscal policy next year, the Political Bureau of the Communist Party, or Politburo, has nonetheless left itself some wiggle room.

"We will maintain the continuity and stability of macro-economic policy," the Politburo concluded in a meeting chaired by President Hu Jintao, according to a report on the state television Web site.

"We will maintain our basic macro-economic policy stance, managing well the intensity, pace and focus of implementing policy...to increase the stability, balance and sustainability of economic growth."

As part of efforts to improve the composition of economic growth, the Politburo said it will pay closer attention to transforming how China grows and to economic restructuring, and will also work to boost domestic consumption next year.

The renewed emphasis on restructuring comes as economic growth has returned to pre-crisis levels. The Politburo said the recovery trend has continued to firm.

Despite signs of stabilization in the global economy, U.S. and Chinese academics have urged Beijing to rely less on exports to the U.S. and more on domestic consumption for economic growth, an objective Beijing has also said it shares.

China will also maintain "reasonable" investment growth next year and improve policies to encourage private-sector investment, the report said. Because public investments have driven the rebound in growth this year, economists say a further pickup in private investment will help sustain growth even after the stimulus program ends at the end of next year.

Additionally, China will improve its policies to stabilize external demand for Chinese products and seek to expand imports, in an attempt to promote a steady increase in foreign trade, the report said.

The government will nurture new sectors, including the services industry, encourage the participation of smaller firms in the economy, and increase its efforts to support innovation in China, as part of broader economic restructuring.

It will continue to improve its policies to help farmers and "do a good job of regulating the market for agricultural produce," the report said. Food prices can be major driver of inflation in China as they have a large weighting in the consumer price index, though the statement didn't mention inflationary risks.

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China's growth accelerates on stimulus boom

China's second-quarter growth accelerated on a stimulus-fed investment boom, the government reported Thursday, sparking a rise in Asian stocks on hopes the world's third-largest economy could help to lead a global recovery.

The economy grew by 7.9 percent from a year earlier, up from the first quarter's 6.1 percent growth rate, the National Bureau of Statistics said. Analysts said full-year growth should easily reach the government's 8 percent target.

"This should give people confidence that China's economy is on strong footing and that there are a lot better days ahead," said Alan Landau, Hong Kong-based president of Marco Polo Pure Asset Management.

The pickup in growth reflected the impact of Beijing's 4 trillion yuan ($586 billion) stimulus, an effort to offset a collapse in exports by pumping money into the economy through spending on public works construction.

"We are in a blood transfusion-led economic recovery," said Rock Jin, chief economist for Sinolink Securities Co. in Beijing.

Many analysts expect China to be the first major country to emerge from the worst global slump since the 1930s. That could help propel global growth as China imports more raw materials, industrial components and consumer goods.

In the United States, a Chinese recovery could help to boost exports of factory and construction equipment and farm goods such as soybeans. But the bulk of China's imports are raw materials such as Australian iron ore and components from other Asian countries, so the direct impact on the United States and Europe might be limited.

China's strong quarterly results, coupled with higher U.S. corporate profits, spurred a rally in Asian stocks. Markets in Tokyo, Hong Kong, South Korea and Singapore all rose. In mainland China, markets fell as investors took profits after a rally, but the benchmark index is still up 75 percent this year on enthusiasm about the stimulus.

The International Monetary Fund raised its forecast of China's 2009 growth this month by one percentage point to 7.5 percent. The World Bank boosted its forecast last month from 6.5 percent to 7.2 percent, citing unexpectedly strong stimulus results.

Still, the Chinese government warned that despite the latest improvement, a full-fledged recovery is not firmly established.

"The difficulties and challenges in the current economic development are still numerous," said a statistics bureau spokesman, Li Xiaochao. "The basis of the rebound of the people's economy is not stable."

Goldman Sachs said compared with the previous quarter — the way other major countries measure economic expansion — growth accelerated to a near-record 16.5 percent on an annualized basis. JP Morgan said it calculated that sequential expansion at 14.9 percent.

China's growth sank last year as global demand for exports collapsed, wiping out up to 30 million factory jobs. But the economy was regarded as poised for a quick a recovery, with strong banks unhampered by the mortgage crisis that battered Western lenders.

State-owned banks have boosted lending to record levels, pushing new credit in the first half to a record 7.3 trillion yuan ($1.1 trillion) and sparking a revival in China's real estate market.

Most of the stimulus has gone to state-owned construction companies and suppliers of cement and steel. But money is flowing to the private sector as builders hire workers and buy other materials.

Industrial output rose 10.7 percent in June from a year earlier, faster than May's 8.9 percent growth, the statistics agency said. It said retail sales rose 15 percent in the first half from a year earlier, while spending on factories and other fixed assets was up 33.5 percent.

Sinolink's Jin said 2.5 percentage points of the 7.9 percent quarterly growth came from stimulus-financed investment and the rest from production.

Zhu Jianfang, chief economist for Citic Securities Ltd., said he expects growth to accelerate to 9 percent in the third quarter and into double digits for the final three months of 2009.

"I think the economy is in a fairly good recovery state," Zhu said. "It's not only stimulated by the government investment but also followed by some private investment. This is a positive change."

Consumer prices in June fell 1.7 percent from a year earlier, the statistics agency said, giving Beijing a freer hand to keep spending on its stimulus without a danger of adding to pressure for prices to rise.

The wave of positive data in recent weeks has encouraged investors, driving a stock market boom that has boosted China's benchmark Shanghai Composite Index by 75 percent since the start of the year.

The jump in lending and investment has prompted warnings from some analysts and even the central bank governor about a possible rise in bad loans and bubbles in real estate and stock prices. But most analysts say potential problems are still modest.

Li, the government spokesman, said Beijing is closely watching to make sure the stimulus does not ignite inflation.

"There are still quite a lot of uncertainties," Li said. "We should remain watchful about changes in prices."

UPDATE 2-World Bank cuts China 2009 GDP forecast to 6.5 pct

* China 2009 GDP forecast lowered by a percentage point

* China urged not to lose sight of rebalancing goals

* World Bank downplays social repercussions of slower growth

The World Bank lowered its forecast for China's 2009 economic growth on Wednesday but warned Beijing that it would be thwarting its own medium-term goals if it tried to offset the slowdown by further boosting investment.

In a quarterly economic update, the bank cut its projection of gross domestic product growth this year to 6.5 percent from the 7.5 percent outcome it had forecast in November. It said there were both upward and downward risks to its outlook.

The global crisis would be a drag both this year and next, mainly via weaker exports and non-government investment, but the bank said China's economic fundamentals were still strong enough to give policymakers the luxury of looking well beyond 2009.

The bank welcomed the inclusion of steps to boost consumption in the government's 4 trillion yuan ($585 billion) stimulus package since over-reliance on capital-intensive investment could damage the pace of job creation and the quality of growth.

Indeed, it said there was room for a further shift towards consumption and for less emphasis on capital spending in order to rebalance the economy so that growth is more sustainable economically, socially and environmentally.

"The fundamentals for China are strong enough to ride out this storm, and it may be just as appropriate to shift the focus as much as possible to the medium and long-term challenges instead of a very narrow focus on short-term growth objectives," Louis Kuijs, the senior economist in the bank's Beijing office, said at a news conference to launch the report.

The bank said it expected 16-17 million non-farm jobs to disappear this year but it played down the social repercussions.

"Somewhat lower overall growth is not likely to jeopardise China's economy or social stability, especially if the adverse consequences of dislocation and layoffs are alleviated by using and expanding the social safety net," the report said.

The median forecast in a Reuters poll of economists published on Wednesday is for GDP to expand by 7.8 percent this year, narrowly missing Beijing's target of 8 percent. [ID:nPEK164391]

For a table with details of the World Bank's forecasts, see [ID:nPEK319067]

For a graphic on China's growth over the past three decades, click on: here

COULD BE WORSE

The bank's advice flies in the face of the ruling Communist Party's determination to do whatever is necessary to meet its self-imposed target of 8 percent growth this year.

Last Friday, Premier Wen Jiabao said the government was ready to roll out extra stimulus measures if needed.

But the World Bank said Beijing should keep some of its powder dry in case growth next year proves even weaker.

What's more, the government cannot hope to take up all the slack left by the collapse in exports and knock-on drop in private investment; for a start, there may be limits to how much money can be spent efficiently on traditional investment schemes.

As it is, the bank already expects 4.9 percentage points of its projected 6.5 percent growth this year to stem from government-influenced investment and public-sector consumption.

"China's economy cannot escape the impact of the global weakness. Government-influenced activity makes up a modest share of the total: it cannot and should not offset fully the downward pressures on market-based activity," the report said.

The bank tempered this message of resignation with the assurance that China would continue to grow substantially faster than most other countries this year and next.

Indeed, the stimulus is already supporting activity and sentiment, even if it is too early to expect a sustained rebound, the World Bank said.

The bank said it expected the yuan to keep strengthening in the next decade given China's prospective balance-of-payments and productivity trends.

Kuijs described the outlook for exports this year as "grim" and "sombre". But he said depreciating the currency in the short term would not help revive exports, because global demand is so weak, and would slow China's switch to consumption-led growth.

Obama Administration Tries to Reassure China on Treasury Debt

The U.S. sought to ease Chinese Premier Wen Jiabao’s concern about the security of his country’s investments in U.S. government debt, reiterating pledges to cut the budget deficit in half in four years.

“There’s no safer investment in the world than in the United States,” White House Press Secretary Robert Gibbs said yesterday at a briefing in Washington.

Gibbs was responding to comments from Wen that China, the U.S. government’s largest creditor, is “worried” about its holdings of Treasuries and wants assurances that the investment is safe. “I request the U.S. to maintain its good credit, to honor its promises and to guarantee the safety of China’s assets,” Wen said at a press briefing in Beijing.

President Barack Obama is relying on China to sustain buying of Treasuries amid record amounts of U.S. debt sales to fund a $787 billion stimulus package and a deficit this year forecast to reach $1.5 trillion. Investors abroad own almost half of all U.S. debt outstanding, and China last year overtook Japan as the biggest foreign buyer.

Wen’s comments contributed to a decline in Treasuries yesterday. Yields on benchmark 10-year notes rose as high as 2.96 percent, from 2.85 percent a day earlier, and closed at 2.89 percent.

White House National Economic Council Director Lawrence Summers, asked yesterday about Wen’s remarks, said overseas “confidence” in Treasuries would be hurt without the administration’s steps to end the economy’s decline.

Japan, China

China held $696 billion in U.S. Treasury debt as of Dec. 31, more than Japan’s holdings of $578 billion. Foreign holdings of U.S. Treasury debt at the end of last year totaled $3.1 trillion.

The Treasury also offered a response that sought to reassure investors.

“The U.S. Treasury market remains the deepest and most liquid market in the world,” Treasury spokeswoman Heather Wong said in an e-mailed statement. “President Obama is committed to taking the steps necessary to restore growth and put this country on the path of fiscal sustainability, including cutting the long-term deficit in half over the next four years.”

During the first five months of fiscal 2009, which began Oct. 1, the U.S. budget deficit swelled to a record $764.5 billion for the period, compared with a $265 billion shortfall during the same period a year earlier. The shortfall this year already has exceeded the record $459 billion gap for all of 2008.

‘Stronger Position’

The administration is “tackling many long-ignored problems, ensuring that the U.S. will be in a stronger position than ever,” Wong said. “We are facing whatever challenges come up and will continue to do so.”

Treasuries have handed investors a loss of 2.7 percent in yuan terms this year, according to Merrill Lynch & Co.’s U.S. Treasury Master index. Chinese holdings of the securities surged 46 percent last year, according to Treasury Department data.

“Of course we are concerned about the safety of our assets,” Wen said after an annual meeting of the legislature. “To be honest, I am a little bit worried.”

Diversifying Reserves

China should seek to “fend off risks” as it diversifies its $1.95 trillion in foreign-exchange reserves, Wen said. Yu Yongding, a former adviser to the central bank, said in an interview on Feb. 10 that the nation should seek guarantees that its Treasury holdings won’t be eroded by “reckless policies.”

Treasuries have benefited from demand as a haven in the past two years as financial companies reported $1.2 trillion in credit losses. China boosted holdings of government debt as it lost more than $5 billion from investing $10.5 billion of its reserves in New York-based Blackstone Group LP, Morgan Stanley and TPG Inc. since mid-2007.

“China won’t sell the U.S. debt now as that will only drive down Treasury prices, hurting not only the U.S. but also the value of its own investments,” said Shen Jianguang, a Hong Kong-based economist at China International Capital Corp., an investment bank partly owned by Morgan Stanley.

U.S. Secretary of State Hillary Clinton urged China, while visiting officials in Beijing on Feb. 22, to continue buying U.S. debt, which she called a “safe investment.”

China urged to make yuan international

China should speed up reforming its financial system to make the yuan an international currency, said political advisors Saturday.

"A significant inspiration to draw from the global financial crisis is that we must play an active role in the reconstruction of the international financial order," said Peter Kwong Ching Woo, chairman of the Hong Kong-based Wharf (Holdings) Ltd.

The key to financial reform is to make the yuan an international currency, said Woo in a speech to the Second Session of the 11th National Committee of the Chinese People's Political Consultative Conference (CPPCC), the country's top political advisory body.

That means using the Chinese currency to settle international trade payments, allowing the yuan freely convertible on the capital account and making it an international reserve currency, he said.

China's yuan, or Renminbi, can be freely convertible on the current account but not on the capital account, preventing it from being a reserve currency or a choice in international trade settlement.

China has announced trial programs to settle trade in the yuan, a move analysts say will facilitate foreign trade as Chinese exporters might face losses if they continue to be paid in the US dollar. The dollar's exchange rate has become more volatile since the global financial crisis.

Economists say the move will increase the acceptance of the currency in Asia, which will help it become an international currency in the long run.

The status of the yuan as an international currency will benefit China by giving it a bigger say in world financial issues and reducing the reliance of its huge foreign reserves on the US dollar, some analysts say.

Other analysts argue a fully convertible yuan will hurt China as it would allow massive capital outflow during a financial crisis.

Meanwhile, Chinese authorities remain cautious.

It's possible that the global financial crisis will facilitate the process of making the yuan internationally accepted, but there's no need to push for that, Yi Gang, vice central bank governor, told Xinhua earlier this month.

That process should be conducive to all sides, he said.

Xu Shanda, former vice director of the State Administration of Taxation and a CPPCC National Committee member, urged for faster paces in making the yuan an international currency as a way of increasing national wealth.

He said the United States and the European Union have obtained hefty royalties from the international use of their currencies while China has become the biggest source of that income.

A royalty, or seigniorage, results from the difference between the cost of printing currency and the face value of the money.

"China's loss due to royalty payment has far exceeded the benefit of not making the yuan an international currency," he said in a speech to the annual session of the CPPCC National Committee, without elaborating.

China's State Council, or Cabinet, said last December it would allow the yuan to be used for settlement between the country's two economic powerhouses -- Guangdong Province and the Yangtze River Delta -- and the special administrative regions of Hong Kong and Macao.

Meanwhile, exporters in Guangxi Zhuang Autonomous Region and Yunnan Province will be allowed to use Renminbi to settle trade payments with ASEAN (Association of Southeast Asian Nations) members.