US embassy cable - 04TAIPEI3663

UNCLAS SECTION 01 OF 02 TAIPEI 003663 
 
SIPDIS 
 
STATE PLEASE PASS AIT/W AND USTR 
 
STATE FOR EAP/RSP/TC, EAP/EP AND EB/IFD/OIA 
 
USTR FOR SCOTT KI 
 
USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER 
USDOC FOR 3132/USFCS/OIO/EAP/ADAVENPORT 
TREASURY FOR OASIA/ZELIKOW AND WISNER 
TREASURY PLEASE PASS TO 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 Economic Review for October 2004 
 
1.  This cable summarizes selected economic events in Taiwan 
in October 2004.  Below is a table of contents: 
 
- China's Interest Rate Hike 
 
- Central Government Budget 
 
- China Airlines Privatization 
 
- Cross-Strait Economic Normalization 
 
- Problem Financial Institutions 
 
Effect of China's Interest Rate Hike 
------------------------------------ 
 
2.  In late October 2004, the People's Bank of China (PBC), 
China's central bank, raised interest rates for the first 
time in nine years.  Taiwan's exports rely heavily on 
production lines based in China, and Taiwan companies will 
face some increased operating costs brought on by higher 
interest rates.  Taiwan economists expect that higher 
interest rates will dampen China's real estate sector and 
cut into Taiwan's exports of construction materials such as 
iron and steel.  However, this will have little impact on 
Taiwan's China-based manufacturing, since most of its 
production is for export to the U.S. and other developed 
markets. 
 
Taiwan's Central Government Budget 
---------------------------------- 
 
3.  According to the proposed 2005 Taiwan government budget, 
income taxes remain the major source of Taiwan's central 
government revenue.  However, Taiwan's Executive Yuan 
expects proceeds from sales of public enterprise equity 
shares to double this year.  It hopes to use these proceeds 
to reduce the growing budget deficit.  Public debt is nearly 
NTD 3.67 billion (USD 107.9 billion) or 35.7 percent of 
Taiwan's GNP.  The extent to which equity sales are able to 
cut public debt will depend on how much can actually be sold 
in the face of strong opposition from labor groups and some 
legislators. 
 
Privatization Plans for CAL Changed 
----------------------------------- 
 
4.  Taiwan's Ministry of Transportation and Communications 
(MOTC) stepped back from plans to fully privatize China 
Airlines (CAL), which is currently 69 percent state-owned, 
by the end of 2005.  In a recent speech, MOTC Minister Lin 
Lin-san said the government needed to keep a controlling 
stake in the airline, though not more than 50 percent.  He 
said that like many other nations, Taiwan should have a 
"national" airline that can demonstrate Taiwan's sovereignty 
to other countries.  CAL's recent profit report for 2004 may 
have influenced the change in policy.  On October 20, CAL 
predicted its 2004 profit would be NTD 90 billion (USD 2.7 
billion). 
 
Cross-Strait Investment Festival 
-------------------------------- 
 
5.  The Taiwan Ministry of Economic Affairs, Straits 
Exchange Foundation, and Mainland Affairs Committee (MAC) 
hosted some 300 participants at their 2004 mid-autumn 
festival event for Taiwan investors in China on October 3-4 
in Taoyuan.  President Chen, Vice President Lu, Premier Yu, 
and MAC Chairman Joseph Wu all took part in the event.  In 
his public remarks, Premier Yu said that Taiwan would 
continue to promote cross-strait economic and trade 
normalization, including expanding China's permitted 
commercial activities in Taiwan, liberalizing tourism and 
professional exchanges, expanding imports, and initiating 
consultations on cross-Strait direct transportation.  MAC 
Chairman Wu reiterated Taiwan's willingness to discuss 
charter flight service with China for Taiwan investors' 
returning to Taiwan for the 2005 Chinese New Year holidays. 
 
6.  Separately, the twelfth annual Taiwan, PRC, and Hong 
Kong insurance cooperation conference took place in Taipei 
from October 25 to 26.  In recent years, Taiwan's Cathay 
Life, Taiwan Life, and Min Tai (Non-life) have all set up 
offices in the PRC.  This year the level of the PRC's 
government representation at the conference was raised to a 
division head insurance supervisory official. 
 
Problem Financial Institutions 
------------------------------ 
 
7.  After more than two years of financial reform, Taiwan's 
smaller financial institutions still have serious, although 
sometimes hidden, problems.  The Agricultural Financial 
Bureau reported to the Legislative Yuan in mid-October 2004 
that only three Farmers' Associations credit departments had 
negative net worth. However, a legislator revealed an 
internal Agricultural Financial Bureau report that concluded 
that 92 out of 279 Farmers' Association credit departments 
had negative net worth.  The internal report also indicated 
that 99 Farmers' Association's credit departments reported 
non-performing loan ratios above 15%.  The discrepancy was 
the result of using two different ways to calculate non- 
performing loans.  The stricter method, which uses the 
internationally accepted definition of non-performing loans 
as no payment of interest or principle for at least three 
months, indicates more of the credit departments have 
negative net worth. 
 
PAAL