US embassy cable - 05TAIPEI1171

UNCLAS SECTION 01 OF 02 TAIPEI 001171 
 
SIPDIS 
 
SENSITIVE 
 
DEPT FOR EAP/TC, EAP/EP AND EB/IFD/OIA 
DEPT PLEASE PASS AIT/W AND USTR 
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: EFIN, EINV, ECON, TW, Cross Strait Economics 
SUBJECT: MARKETS STEADY AS TAIWAN REACTS TO ANTI-SECESSION 
LAW 
 
REF: TAIPEI 1029 
 
Summary 
------- 
 
1. (SBU) Taiwan's stock market showed a significant drop 
March 14 and 15 as the PRC passed the Anti-Secession Law and 
Taiwan's officials reacted.  The NT dollar also lost value. 
However, it is unclear whether these declines were a result 
of the Anti-Secession Law or completely unrelated factors. 
Regardless, the stock market's slight recovery on March 16 
showed that nerves were calming.  Investors may be 
withholding judgment to see how Taiwan reacts in the days 
leading up to the March 26 protest demonstration in Taipei. 
If the Chen administration can maintain a fairly moderate 
response, the markets may not be affected at all.  End 
summary. 
 
 
The Markets React...to What? 
---------------------------- 
 
2. (U) On March 14, 2005, the PRC's National Peoples' 
Congress enacted the Anti-secession Law after releasing its 
complete text for the first time.  Although President Chen 
Shui-bian initially remained uncharacteristically quiet, his 
administration's officials responded with strong 
condemnation.  Taiwan authorities have called for a one 
million-person demonstration in Taipei on March 26 to protest 
the laws. 
 
3. (U) Taiwan's stock price index lost 140.75 points during 
March 14 and 15 to 6,063.48 points.  The single-day loss on 
March 15 was 1.5 percent.  Over 80 percent of listed issues 
posted stock price losses on March 15.  Foreign portfolio 
investors sold more than they purchased.  Their net stock 
sales totaled NT$2.4 billion on March 14 and NT$3.3 billion 
on March 15.  The NTD depreciated 1.2 NT cents on March 14 
and 16.8 NT cents on March 15 to NTD 31 per USD.  However, 
markets may also have been responding to expectations of an 
interest rate hike by the U.S. Federal Reserve Board on March 
22 that generally weakened Asian currencies. 
 
...and Return to Calm 
--------------------- 
 
4. (U) After Monday's and Tuesday's declines, Taiwan's stock 
market index inched up 0.15% March 16 to close at 6,072.36 
points.  Of 1,007 issues listed on the stock market, 48.7% 
reported drops in stock prices on March 16, much less than 
the 82.5% of listed stocks a day earlier.  Foreign investors 
again posted net stock sales of NTD 5.5 billion on March 16. 
The March 16 trading volume of NT$59.5 billion was less than 
the normal daily volume of NT$80-100 billion.  Huang Wen-jur, 
a senior consultant to the SinoPac Securities Company, told 
AIT/T that the smaller trading volume reflected portfolio 
investors' wait-and-see attitude. 
 
 
5. (U) On the foreign exchange market, the NT dollar lost 2.7 
NT cents to NT$31.027 per US dollar.  The depreciation of 2.7 
NT cents on March 16 was much smaller than the decline on 
March 15.  The trading volume of US$1.2 billion was also 
lower than US$1.5 billion on the previous day.  Alex Pan, a 
senior foreign exchange trader with the Bank of America, 
commented that Taiwan's market had been relatively calm 
because the NT dollar's depreciation of 0.6% against the US 
dollar on March 15 and 16 was much less than the 2% 
devaluation for Korean won. 
 
No Capital Flight 
----------------- 
 
6. (SBU) There has been no evidence of capital flight in 
reaction to the Anti-Secession Law.  George Chou, Director 
General of the CBD's Foreign Exchange Department (strictly 
protect), told AIT/T that on March 15 foreign portfolio 
investors continued to post net inward remittances of dozens 
of millions of USD.  On May 16 and 17, there was some small 
capital outflow because hedge funds pulled money out of Asia, 
including Taiwan, South Korea, Singapore, Malaysia, and 
Indonesia.  George Chou quoted a source at State Street, one 
of the three largest custodian banks in the United States, to 
explain that hedge fund withdrawals from Asia in general was 
one main cause for recent weakness of Asian currencies. 
 
Comment ) Market Holding Its Breath 
----------------------------------- 
 
7. (SBU) It is not clear whether the modest declines in the 
stock market and the value of the NT dollar early this week 
were a reaction to the release of the full text of the PRC's 
Anti-Secession Law, its passage by the National People's 
Congress, Taiwan officials' response or any number of other 
factors completely unrelated to the new law.  Regardless, the 
reaction was small.  Wednesday's slight stock price recovery 
shows that the markets' nerves are relatively steady as it 
waits to see the results of moves and countermoves by Taiwan 
and the PRC in the days leading to the March 26 protest 
demonstrations in Taipei.  If the PRC's actions, the 
international reaction, and the domestic political 
environment offer the Chen administration the maneuverability 
to maintain some measure of moderation in its response, then 
the Anti-Secession Law could turn out to be a non-event for 
Taiwan's financial markets.  End comment. 
PAAL