US embassy cable - 05TAIPEI1152

UNCLAS SECTION 01 OF 03 TAIPEI 001152 
 
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/MOGHTADER 
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's 2004 Balance of Payments 
 
REF: Taipei 875 
 
SUMMARY 
------- 
 
1.  In 2004 Taiwan's balance of payments (BOP) posted a 
surplus of US$26.6 billion, resulting from its trade 
surplus, earnings from foreign exchange reserves, and 
capital inflows prompted by continued Taiwan Dollar (NTD) 
appreciation against the USD.  The stronger NTD appears to 
be cutting  into Taiwan's trade surplus.  END SUMMARY. 
 
Surplus Builds Foreign Exchange Reserves 
---------------------------------------- 
 
2.  Taiwan recorded a BOP surplus of US$26.6 billion in 
2004, the seventh consecutive annual surplus.  The BOP 
surplus and revaluation of reserve currencies against the 
USD drove Taiwan's foreign exchange reserves up 17% to 
US$241.7 billion, the third highest after Japan's US$844.5 
billion and China's US$609.9 billion.  Taiwan's Central Bank 
(CBC) says about one-quarter of Taiwan's foreign exchange 
reserves are denominated in non-U.S. currencies. 
Appreciation of these currencies in 2004 was 8.1% for the 
EURO, 4.3% for the Japanese Yen, and 1.1% for the Pound 
Sterling. 
 
Foreign Exchange Reserve Composition Unchanged 
--------------------------------------------- - 
 
4.  On February 23, Taiwan's Commercial Times newspaper 
reported that the Central Banks of Taiwan and South Korea 
had dumped USD assets, contributing to rapid depreciation of 
the USD.  Taiwan's CBC quickly denied the report.  George 
Chou, Director General of the CBC's Foreign Exchange 
Department, told AIT/T that the composition of Taiwan's 
foreign exchange reserves had remained basically unchanged 
over the past two years (reftel). 
 
Components of 2004 BOP Surplus 
------------------------------ 
 
5.  Taiwan's BOP surplus for 2004 totaled US$26.6 billion of 
which 71.5% came from the current account (C/A) surplus and 
23.9% from the financial account (F/A) surplus.  Net errors 
and omissions made up the rest.  Taiwan has had a C/A 
surplus every year over the past five decades except for the 
oil-shock years of 1974, 1975 and 1980.  Taiwan's C/A 
surplus of US$19.0 billion in 2004 resulted from a trade 
surplus of US$16.5 billion and net factor income (income 
residents receive from abroad less similar payments made to 
non-residents) of US$11.5 billion.  These surpluses offset a 
service trade deficit of US$5 billion and a current transfer 
deficit of US$3.9 billion.  In 2004, merchandise exports and 
merchandise imports equaled 57% and 55% of GDP, 
respectively.  Taiwan's Capital Account deficit of US$77 
million in 2004 has declined steadily from US$287 million in 
2000, reflecting a drop in net capital transferred out of 
Taiwan by residents emigrating overseas. 
 
Major Sources of Imports: USA and Japan 
--------------------------------------- 
 
6.  Only nine percent of Taiwan's total imports are consumer 
goods, while over 90% are production inputs such as raw 
materials, intermediary goods, and machinery and equipment. 
The United States and Japan are the two major sources of 
Taiwan's imports and provide most of the required 
manufacturing technologies.  In 2004, 13% of Taiwan's total 
imports came from the United States and 26% from Japan. 
 
Exports from China 
------------------ 
7.  Although China surpassed the United States as Taiwan's 
largest export market in 2001, the United States is still a 
major export destination.  Taiwan's exports to China are 
mainly inputs to be processed for re-export to the United 
States.  Business firms take orders in Taiwan and ship 
products to foreign buyers from China.  Export orders coming 
from the United States account for the largest share (nearly 
30%) of total foreign orders received by Taiwan in 2004, 
higher than the 16% of Taiwan's exports shipped directly to 
the United States.  In 2004, the United States and Greater 
China (China plus Hong Kong) accounted for over half of 
Taiwan's total exports. 
 
Factor Income 
------------- 
 
8.  Taiwan's 2004 earnings of US$10.9 billion on its foreign 
exchange reserves constituted 96% of total Factor Income 
(payments residents receive from abroad for land, 
entrepreneurship, labor, and capital) surplus last year. 
The CBC earned an overall 4.5% rate of return for Taiwan's 
foreign exchange reserves in 2004.  Inflows to Taiwan from 
dividends and profits distributed by overseas branches or 
subsidiaries of Taiwan companies in 2004 for the first time 
exceeded outflows from foreign firms in Taiwan.  Taiwan's 
services trade deficit was down from US$9 billion in 1995 to 
US$5 billion in 2004. 
 
Capital Supplier to the World 
----------------------------- 
 
9.  Despite Taiwan's Financial Account surplus of US$6.4 
billion in 2004, which indicates a large net capital inflow, 
Taiwan remained a major capital supplier to other countries. 
Outbound portfolio investment in 2004 amounted to US$23.5 
billion, 38% more than the US$17 billion of inbound 
portfolio investment.  Taiwan's direct investment overseas 
in 2004 totaled US$7.1 billion; nearly quadruple the US$1.9 
billion in foreign direct investment in Taiwan.  Outward 
direct investment has exceeded inward direct investment 
every year since 1987 when Taiwan first permitted investment 
in China.  Taiwan's cumulative overseas investment approved 
by the Ministry of Economic Affairs through December 2004 
totaled US$83.3 billion, half of which went to China.  A 
significant part of the non-China investment went to China 
via Hong Kong, the United States, and tax havens such as 
Bermuda, The Cayman Islands and The British Virgin Islands. 
The CBC estimates Taiwan's investment in China exceeds US$70 
billion. 
 
Capital Inflow by Speculators 
----------------------------- 
 
10.  The 2004 Financial Account surplus of US$6.4 billion 
resulted mainly from capital inflows by speculators 
expecting continued appreciation of the NTD.  CBC Economic 
Research Department senior specialist Chen Yu-shiu told 
AIT/T that in the second half of 2004, the NT dollar (NTD) 
appreciated 6.7% against the USD, much higher than would be 
expected just from the interest rate gap between USD and NTD 
deposits.  Foreigners deposited US$10 billion with Taiwan 
banks last year.  Some foreign portfolio investors parked 
investment funds in bank accounts in expectations of foreign 
exchange gains, according to Chen. 
 
Prospects 
--------- 
 
11.  Taiwan's C/A surplus has strengthened the NTD, and the 
stronger NTD has led to changes in the pattern of Taiwan's 
foreign trade.  The NTD's 10% appreciation against the USD 
since mid-2004 has helped reduce Taiwan's trade surplus from 
US$4.7 billion in Q3 of 2003 to US$2.4 billion in Q3 of 
2004, down to a trade deficit of US$0.2 billion appeared in 
Q4 of 2004.  Taiwan's trade surplus in the first two months 
of 2005 dropped 51% from the same period a year ago.  Local 
economists think that in the longer term, Taiwan will 
continue to post a trade surplus and C/A surplus, although 
smaller than in 2003 and 2004 and that the strong NTD will 
continue to attract foreign capital, unless cross-Strait 
relations deteriorate significantly. 
 
PAAL