US embassy cable - 04TAIPEI3495

UNCLAS SECTION 01 OF 02 TAIPEI 003495 
 
SIPDIS 
 
SENSITIVE 
 
STATE PASS AIT/W AND USTR 
STATE FOR EAP/RSP/TD, EAP/EP AND EAP/IFD/OIA 
USTR FOR SCOTT KI 
USDOC FOR 4420/USFCS/OEEA/EAP/LDROKER 
USDOC FOR 3132/FCS/OIO/EAP/ADAVENPORT 
TREASURY FOR OASIA/ZELIKOW ADN WISNER 
TREASURY PLEASE PASS OT OCC AMCMAHON 
TREASURY ALSO PASS TO FEDERAL RESERVE BOARD OF GOVERNORS, 
AND SAN FRANCISCO FRB/TERESA CURRAN 
 
E.O. 12958: N/A 
TAGS: EINV, EFIN, ECON, TW 
SUBJECT: TAIWAN MINISTER OF FINANCE ON GOVERNMENT DEFICIT 
 
REF: TAIPEI 3444 
 
 1.  (SBU) Summary:  Finance Minister Lin Chuan discussed 
financial reform, taxation, and public finance during a 
courtesy call by AIT/T/DDIR Keegan and EAP/TC/DD Levy on 
October 28.  Lin said that the government budget deficit was 
the most time-consuming of his responsibilities.  He asked if 
there were opportunities for Taiwan tax officials to 
participate in training or exchange programs with U.S. tax 
officials (action request para 11.)  End summary. 
 
Budget Deficit the Biggest Worry 
-------------------------------- 
 
2.  (SBU) During a &familiarization8 call by AIT Deputy 
Director Keegan and EAP/TC Deputy Director Levy, Taiwan 
Finance Minister Lin Chuan said that the central government 
budget deficit was a constant worry.  Lin noted that 
Taiwan,s central government had suffered budget deficits 
since the early 1990,s for various reasons, including the 
relocation of labor-intensive industries offshore and 
economic recession in 2001.  The integration of corporate and 
personal income tax into a single return in the late the 
1990s resulted in significant losses of tax revenue.  Lin 
observed that since President Chen was elected in 2000, the 
opposition-controlled Legislative Yuan (LY) set numerous 
restrictions to prevent the planned sales of equity shares in 
state-owned companies*- a major source of revenue for 
previous administrations. 
 
Tax Reform Key, But Difficult 
----------------------------- 
 
3.  (SBU) Lin said that the Ministry of Finance (MOF) hopes 
tax reform can help address the budget deficit issue, but 
reaching consensus among government agencies and legislators 
on tax issues was difficult. 
 
Local Government Funding 
------------------------ 
 
4.  (SBU) Minister Lin noted that many of Taiwan,s local 
governments are also having fiscal problems.  Taiwan,s local 
governments are popularly elected, and have authority to 
spend, but lack authority to impose taxes and must rely on 
funds from the central government.  Competition for funds 
between Taipei City and other municipalities in Taiwan has 
become more intense.  The MOF has developed a more 
transparent and equitable formula to allocate central 
government funds, but has assured Taipei City that its 
funding will not decrease. 
 
Financial Reforms Can Also Reduce the Deficit 
--------------------------------------------- 
 
5.  (SBU) Minister Lin thought the budget deficit could also 
be remedied by continuing the financial reforms already 
underway and developing service sector industries, 
particularly financial services, to replace lost 
manufacturing jobs and tax revenues.  Lin hoped that along 
with expansion of the financial sector would come a more 
sophisticated approach to taxation and a better understanding 
of new financial products.  However, he noted that primary 
responsibility for financial reform had shifted from the MOF 
to the new Financial Supervisory Commission (FSC) that was 
established in July.  (Note: The FSC was established to 
consolidate regulatory control of banking, insurance, and 
securities products from the three agencies previously 
responsibile for these areas.  A single regulatory agency was 
supposed to provide better supervision and better risk 
management, and be more in line with international trends. 
End note.) 
 
First Phase of Financial Reform Complete 
---------------------------------------- 
 
6.  (SBU) Minister Lin said that when reforms started in 
2001, increased transparency in the banking sector brought 
hidden problems to light.  In 2002 the average non-performing 
loan (NPL) ratio shot up above 11% (using the internationally 
accepted definition of NPLs-- i.e., loans with principle or 
interest payments more than three months overdue. Up to now, 
Taiwan has only treated loans six months overdue as 
non-performning.)  To address this problem, Taiwan required 
that banks write off bad debts or sell problem assets.  He 
said that under the first-stage financial reform, the NPL 
ratio had dropped to below 5%. 
 
7.  (SBU) Minister Lin noted that the MOF had also built a 
mechanism for problem banks to retreat from the market.  The 
Financial Reconstruction Fund (FRF), similar to the U.S. 
Resolution Trust Corporation, was funded with NT$140 billion 
to resolve bad bank debt.  However, the fund was almost 
exhausted by the problems of small community financial 
institutions (farmers and fishermen credit coops) and the 
sale earlier this year of the Kaohsiung Business Bank. 
Minister Lin believed the MOF had gained much valuable 
experience dealing with closing banks that would benefit the 
FSC in managing the sale of other problem banks. 
 
Foreign Investors Uninterested in Chung Shing Bank 
--------------------------------------------- ----- 
 
8.  (SBU) Taiwan will auction off the Chung Shing Bank (CSB) 
and its 34 branches, now in receivership, on December 9 as 
part of on-going efforts to reduce the number of banks and 
improve the health of the financial sector (reftel). 
Minister Lin said that while foreign investors were permitted 
to bid, he did not think they were interested in actually 
running the bank.  He thought they were only interested in 
profiting from dismantling it.  Lin noted that the bid winner 
can reduce CSB employees substantially, but must provide a 
defined severance pay. 
 
The Next Stage of Financial Reform 
---------------------------------- 
 
9.  (SBU) In the next stage of financial reform, Lin said, 
the top priority is to reduce the number of financial 
institutions.  One difficulty is that many of Taiwan's 
private banks are family-owned and managed, and the families 
resist merging with larger banks. The MOF has developed plans 
for the merger of the less efficient state-owned banks. 
Under past privatization programs, equity shares in 
state-owned banks have been sold and, consequently, 
government ownership in many of these banks is already below 
50%.  Minister Lin said Taiwan hopes to sell 100% of 
ownership of one or two healthy state-owned banks to foreign 
investors in order to sharpen competition and pressure other 
banks to consolidate.  One good candidate for such a foreign 
sale is the banking part of the Central Trust of China (CTC). 
 With 26 branches, the CTC,s banking operations are small 
but good. 
 
Financial Policy 
------------------- 
 
10.  (SBU) According to recent draft amendments to the EY 
(i.e., executive branch) Organization Statute, financial 
policy-making authority will shift from the FSC back to the 
MOF.  Minister Lin explained that earlier legislation 
strictly defined FSC as an independent agency, not subject to 
executive branch jurisdiction.  Lin believed the shift of 
policy authority to MOF is necessary for the executive branch 
to retain control of financial policy-making. 
 
Request for Information on Tax Training/Exchange 
--------------------------------------------- --- 
 
11.  (SBU) Minister Lin asked for information on the 
possibility of Taiwan tax officials participating in training 
or exchange programs with U.S. counterparts in order to 
improve Taiwan,s taxation technical skills.  AIT would 
appreciate information on whether there are any appropriate 
U.S. Treasury programs for training foreign tax officials. 
PAAL