By Yimou Lee

YILAN, Taiwan, July 24 (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.

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.

Ahead of the typhoon hitting China, several coastal

provinces began preparing with Fujian raising emergency response

plans. China's State Flood Control and Drought Relief

Headquarters also issued a heightened emergency response for

flooding in Fujian and next door Zhejiang province.

Forecasters expect heavy rainfall across several provinces

over the next coming days as the typhoon makes its way north.

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.