US embassy cable - 05TAIPEI2290

UNCLAS TAIPEI 002290 
 
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 Reacts to Treasury Department's FX Report 
 
 
1.  In response to the U.S. Treasury Department's "Report to 
the Congress on International Economic and Exchange Rate 
Policies" released on May 17, Taiwan Central Bank Governor 
Perng Fai-nan sent a letter to AIT/T Director Paal. 
Governor Perng said that Taiwan's foreign exchange (FX) 
policy is not designed to pursue larger trade surplus and 
accumulation of FX reserves.  He said that market forces 
determine the FX rates.  He notes that the Central Bank 
intervenes in the FX market when the market deviates away 
from economic fundamentals. 
 
2.  Substantive portion of Governor Perng's letter: 
 
BEGIN TEXT: 
 
The US Department of Treasury released the latest "Report to 
the Congress on International Economic and Exchange Rate 
Policies" on May 17.  While I have found the section on 
Taiwan to be both lucid and insightful, there are a couple 
of thoughts that I would like to share with you. 
 
First, Taiwan's trade surplus has declined quite sharply 
over the past two years.  The trade balance was US$6.1 
billion in surplus for 2004 as a whole.  For the first four 
months of this year the balance on goods registered a 
surplus of US$373 million, in marked contrast to the US$2.9 
billion recorded over the same period in 2004.  The size of 
this surplus is more than offset by the estimated US$600 
million spent by Taiwanese tourists abroad every month. 
 
Secondly, on the subject of the NT dollar exchange rate, I 
thought it was perhaps a little unfair and somewhat 
misleading to conclude the section on Taiwan by saying the 
Central Bank may enter the foreign exchange market to make 
adjustments to maintain stability as the currency 
strengthens.  I would like to reaffirm that Taiwan's 
exchange rate system is managed float.  The exchange rate is 
determined by market forces, but if it becomes more volatile 
than can be explained by economic fundamentals the central 
bank will step in to maintain dynamic stability.  The 
central bank does not have a view on the future direction 
the NT dollar exchange rate, nor do we know whether the 
development in the foreign exchange market will necessitate 
our involvement going forward. 
 
END TEXT. 
PAAL