US embassy cable - 04TAIPEI3992

UNCLAS SECTION 01 OF 02 TAIPEI 003992 
 
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 Growth Slowing 
 
 
SUMMARY 
------- 
 
1.  Taiwan's economic growth is expected to drop from 7.3 
percent in the first half of 2004 to 4.7 percent in the 
second half following declines in export growth, industrial 
production, and private investment.  END SUMMARY. 
 
Economic Slowdown 
----------------- 
 
2.  In late November 2004, the Directorate General of 
Budget, Accounting and Statistics (DGBAS) adjusted Taiwan's 
estimated 2004 economic growth upward for the fifth time to 
nearly six percent.  At the same time, DGBAS predicted 
Taiwan's economic growth would slow from 7.3 percent in the 
first half of 2004 to 4.7 percent in the second half and 
further down to 4.5 percent in the second half of 2005. 
 
3.  Tsai Hung-kun, Deputy Director of the DGBAS' Statistics 
Bureau, attributed Taiwan's economic slowdown mainly to 
three factors: rising interest rates and oil prices and the 
"negative wealth effect" of falling stock prices.  The U.S. 
Federal Reserve Board's raising interest by one percentage 
point during June - October dampened lowered demand for 
Taiwan's exports.  Higher oil prices pushed up prices and 
dampened Taiwan consumer spending in Taiwan.  A decline in 
Taiwan stock prices in the third quarter of 2004 reduced the 
wealth of local consumers,  and further weakeninged their 
confidence and demand. 
 
Export and Import Growth Down 
----------------------------- 
 
4.  According to DGBAS, export growth in 2004 declined from 
29 percent in the second quarter to 21 percent in the third 
quarter and will fall to an estimated 12 percent in the 
fourth quarter.  Deputy Director Tsai projected that export 
growth would drop to seven percent in 2005.  He predicted 
import growth would slow from 40 percent in the second 
quarter to 19 percent in the fourth quarter of 2004 and down 
to six percent in 2005. 
 
Orders Filled by Offshore Production Bases 
------------------------------------------ 
 
5.  However, the growth of export orders has not declined 
along with the decline in growth of exports.  This reflects 
the fact that Taiwan offshore production factories fill an 
increasing percentage of export orders received by Taiwan 
companies.  According to a Ministry of Economic Affairs 
(MOEA) survey, export orders have grownth at a year-on-year 
rate of 26 percent for the first ten months of 2004.  A 
survey by the Ministry of Economic Affairs showed that 
Taiwan business firms filled nearly 40 percent of the export 
orders by shipments from overseas production factories and 
that 60-70 percent of those shipments came from China. 
 
Strong Competition from South Korea 
----------------------------------- 
6.  According to MOEA officials, strong competition from 
South Korea is eroding Taiwan business firms' market in 
China, particularly in the high-tech area.  Demand from 
Taiwan-invested down-stream flat panel display firms in 
China contributed to triple-digit growth in Taiwan's exports 
of flat panels and related products to China in the first 
half of 2004.  However, according to MOEA, South Korean 
competitors have successfully snatched a large share of this 
market in China by undercutting Taiwan prices on these 
products.  As a result, Taiwan's exports of flat panel 
products posted a decline from 140 percent growth in the 
first seven months to 86 percent in August and 20 percent in 
September 2004.  South Korea replaced Taiwan as the second 
largest source of China's imports in September 2004. 
 
Investment and Money Supply Growth Decline 
------------------------------------------ 
 
7.  Slower export growth in the second quarter was reflected 
in rising inventories in the fourth quarter and a drop in 
private investment growth from 33 percent to 20 percent. 
DGBAS predicts private investment growth in 2005 would slip 
to nine percent.  Industrial growth dropped from 14 percent 
in the first quarter and 15 percent in the third quarter to 
three percent in October 2004.  Another indication of 
economic slowdown is declining money supply growth.  M1B 
growth in October 2004 at 14.7 percent was the lowest in 14 
months.  Growth in M2 plus bond funds also hit a 12-month 
low of 6.3 percent.  (M1B is a measure of money that refers 
primarily to money that can be used in transactions.  M2 is 
a broader measure of money that includes M1B plus deposited 
money that cannot be readily used in transactions.) 
 
Lowest Unemployment in Three Years 
---------------------------------- 
 
8.  Despite the economic slowdown, Taiwan's unemployment 
rate in October 2004 declined to 4.3 percent, the lowest 
rate in three years and down from 5.3 percent in August 2002 
and the lowest rate in three years. 
 
Manufacturing Firms: Pessimistic 
------------------------------- 
 
9.  An October 2004 survey showed that only 13 percent of 
Taiwan businesses expect business performance to improve 
over the coming three months, down from over 33 percent in 
January and February 2004. 
 
KEEGAN