US embassy cable - 05TAIPEI1582

UNCLAS SECTION 01 OF 03 TAIPEI 001582 
 
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, PINR, TW, Cross Strait Economics 
SUBJECT:  Economic Briefing for March 2005 
 
 
Introduction and Summary 
------------------------ 
 
1.  This cable summarizes selected recent economic events in 
Taiwan in March 2005: 
 
--Taiwan's economic performance in Q1 of 2005 
 
--Privatization of two large state-owned enterprises 
 
--Legal-regulatory workshop for export control 
 
--High-Speed Rail Continues Efforts to Raise Capital 
 
--Taiwan reaction to China's Anti-session Law 
 
END INTRODUCTION AND SUMMARY. 
 
Economic Slowdown Continues Through Q1 
-------------------------------------- 
 
2.  A leading indicator compiled by Taiwan's Council for 
Economic Planning and Development (CEPD) for February 2005 
showed a decline of 1.3% (compared to the previous month), 
signaling continuation of the economic slowdown from 2004 to 
Q1 of 2005.  Export growth declined steadily from well over 
20% in the first half of 2004 to 8% in the first two months 
of 2005.  Industrial production declined in January-February 
2005 and the unemployment rate posted its first increase in 
seven months.  The manufacturing facility utilization rate 
in February 2005 fell to 77%, the lowest in the past two 
years.  Profits dropped to 4.6% of sales, the lowest in the 
past one and a half years.  Higher import prices of crude 
oil and other materials brought inflationary pressure, 
prompting Taiwan's Central Bank of China to raise interest 
rates in late March 2005. 
 
3.  In spite of the economic slowdown, Taiwan businesses are 
optimistic.  According to a survey conducted by the Taiwan 
Institute of Economic Research (TIER) in March 2005, 55% of 
respondents expected better business performance in the next 
six months, compared to 8.5% anticipating worse performance. 
Major local economic think tanks expect that public 
construction projects and incentives for emerging industries 
could help Taiwan's economy in the second half of 2005. 
Foreign bankers, however, forecast that Taiwan's investment 
expansion and economic growth in 2005 will slow 
significantly because of higher interest rates will dampen 
consumption in the United States, an important export 
market. 
 
Privatization - Chunghwa Telecom Company 
---------------------------------------- 
 
4.  In early March 2005, Premier Frank Hsieh instructed the 
Ministry of Transportation and Communications (MOTC) to sell 
17% of government equity in the Chunghwa Telecom Company 
(CTC) by mid-2005.  CTC is the largest telecom firm on the 
island, with 84% of Taiwan's telecom market.  The CTC sale, 
the island's largest secondary share offering ever, would 
reduce government ownership from 64.89% to 47.89%, making 
CTC a private firm according to Taiwan's definition of 
"state-ownership."  CTC labor unions have opposed 
privatization and may try to block the planned sale. 
Privatization - Changhwa Commercial Bank 
---------------------------------------- 
5.  On March 18, two foreign consortia bid on Changhwa 
Commercial Bank (CCB), slated to become the first Taiwan 
state-owned bank sold to foreign investors.  The CCB will 
award 1.4 billion Global Depository Receipt (GDR) shares, 
equivalent to 22% equity, to the high bidder.  The GDR bid 
winner will then be permitted to purchase another 18% 
ownership stake in CCB directly from the government.  This 
will enable the winning bidder to have effective control 
with a 40% equity stake.  The sale of CCB will meet the 
Taiwan's financial reform goal of selling at least one state- 
owned bank to foreign investors before the end of 2005. 
However, in a sign of possible problems in the CCB sale, 
Treasury Department Director General Liu Deng-cheng 
announced on March 22 that the government would not approve 
the sale if bids were far below the market price.  Several 
days later, CCB Vice President Hsieh Chao-nan denied the 
press reports and noted that the government and bidders were 
still negotiating on the CCB sale. 
 
Praise for Workshop on Export Controls 
-------------------------------------- 
 
6. Several Taiwan officials have praised the recent four-day 
Legal-Regulatory Workshop sponsored by the State Department 
NP/ECC/EXBS program in Taipei March 22-25.  They noted that 
the training "made real" concepts they had heard, but did 
not fully understand.  They also noted that the Workshop 
brought together Taiwan government officials from 
essentially all Taiwan ministries and agencies involved in 
export controls and gave them a chance to share 
perspectives.  The workshop featured active participation by 
the attendees, particularly those from the Board of Foreign 
Trade (BOFT), National Security Council, Customs Service, 
and Science Park Administration.  In the wrap-up session, 
BOFT announced a near-term, mid-term, and long-term work 
agenda that included remedying several specific defects in 
Taiwan's current export control laws and implementation 
procedures identified during the seminar. 
 
High-Speed Rail Announces 11th Revision of Financial Plan 
--------------------------------------------- ----------- 
 
7.  After failing to meet the fund raising requirements of 
its financial plan for the tenth time, the Taiwan High-Speed 
Rail Corporation (THSRC) revised its plan for raising 
capital again at a stockholders meeting on March 4.  The 
plan calls for THSRC to raise NT$ 13.5 billion (about USD 
420 million) by the end of May by issuing preferred stock. 
The plan calls for THSRC to raise the first NT$ 6 billion 
(about USD 190 million) by the end of March.  THSRC and the 
Ministry of Transportation and Communications have also 
called on the Legislative Yuan to permit additional 
investment by state-owned enterprises (SOEs) in THSRC.  SOE 
investment now stands at about 16 percent of THSRC's total 
capital.  On March 9, MOTC reaffirmed that the high-speed 
rail will open on time on October 31, 2005. 
 
Hsieh Reiterates "Active Opening, Effective Management" 
Policy 
--------------------------------------------- --------------- 
-- 
8.  Two days after hundreds of thousands took to the streets 
of Taipei to express opposition to China's Anti-secession 
law, Premier Frank Hsieh assured Taiwan's Legislative Yuan 
that the current Taiwan policy of "actively opening 
(investment in China) with effective management" remains 
unchanged.  He assured that the government would not go back 
to the "patience without haste" era.  He noted that the 
government will relax laws (for cross-Strait economic 
exchanges) but will enforce them strictly.  With the 
government's policies unchanged, a mission organized by 
Taiwan's Chinese National Federation of Industries (CNFI) to 
visit China and CNFI Chairman Earl Ho's planned meeting with 
Taiwan business people in China will proceed in June 2005 as 
scheduled.  Local observers believed that higher interest 
rates in the United States had more to do with the recent 
NTD depreciation and stock price decline than the recent 
cross-Strait events. 
PAAL