By Yimou Lee

YILAN, Taiwan (Reuters) -Taiwan hunkered down on Wednesday ahead of the arrival of Typhoon Gaemi, with financial markets closed, people given the day off work, flights cancelled, and the military put on stand-by amid forecasts of torrential rain and strong winds.

Gaemi, the first typhoon of the season to affect Taiwan, is expected to make landfall on the northeast coast early evening on Wednesday, according to the island's Central Weather Administration.

Currently categorised as a medium-strength typhoon by Taiwan, it is then likely to move across the Taiwan Strait and then hit the southeastern Chinese province of Fujian late afternoon Friday.

In rural Yilan county, where the typhoon will first hit land, wind and rain gathered strength, shutting breakfast eateries and roads mostly emptied.

"This could be the biggest typhoon in recent years," fishing boat captain Hung Chun told Reuters, adding Yilan's Suao harbour was packed with boats seeking shelter.

"It's charging directly towards the east coast and if it makes landfall here the damage would be enormous."

Work and school are suspended across Taiwan, with the streets of capital Taipei almost deserted during what is normally rush hour amid squally rain.

The transport ministry said almost all domestic flights had been cancelled, along with 27 international flights.

However, TSMC, the world's largest contract chipmaker and a major supplier to Apple ( AAPL ), said it expected its factories to maintain normal production during the typhoon, adding it had activated routine preparation procedures.

SOLDIERS STANDING BY

Some mountainous central and southern Taiwan counties are expected to see total rainfall of up to 1,800 mm (70 inches) during the typhoon, the weather administration said.

More than 2,000 people have been evacuated from sparsely populated mountain areas, the government said, which are at high risk of landslides from the "extremely torrential rain".

Taiwan's defence ministry said it was ready to assist with disaster relief and had put 29,000 soldiers on stand-by.

While the typhoon has severely curtailed this year's annual Han Kuang war games they have not been totally cancelled, with live fire drills taking place as scheduled on the Penghu islands in the Taiwan Strait on Wednesday morning.

The typhoon is forecast to make landfall in China's Fujian late Thursday.

Gaemi, with a cloud system spanning the Western Pacific, northern Philippines and parts of the South China Sea, is expected then to turn north, bringing rain to provinces such as Hubei, Henan and even Hebei.

Gaemi will start to lose its power and structure as it moves over land, but its remnants may still bring days of precipitation to northern Chinese provinces, which just a year ago were battered by historic rains due to a typhoon and suffered record economic losses.

Gaemi and a southwest monsoon brought heavy rain on Wednesday to the Philippine capital region and northern provinces, prompting authorities to halt work and classes, while stock and foreign exchange trading were suspended.

While typhoons can be highly destructive, Taiwan also relies on them to replenish reservoirs after the traditionally drier winter months, especially for the southern part of the island.