US embassy cable - 05TAIPEI2434

UNCLAS SECTION 01 OF 02 TAIPEI 002434 
 
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, ESTH 
SUBJECT:  Economic Briefing for May 2005 
 
Introduction and Summary 
------------------------ 
 
1.  This cable summarizes selected recent economic events in 
Taiwan in May 2005: 
 
-- Lowest Growth since 2003 
 
-- FRF Funds Increased, But Not Enough 
 
-- Plans to Relax Cross-Strait Investment Restrictions 
 
-- ICPI Discusses Pharmaceutical Pricing and Reform 
 
-- HIV/AIDS Infections Skyrocket 
 
END INTRODUCTION AND SUMMARY. 
 
2.  Lowest Growth since 2003 
    ------------------------ 
 
Taiwan's economy in Q1 2005 posted its worst performance 
since the middle of 2003.  A steady slowdown in export 
growth and a decline in manufacturing production prompted 
the Directorate General of Budget, Accounting and Statistics 
(DGBAS) to lower Taiwan's economic growth in Q1 of 2005 to 
2.54% from the 4.03% predicted in February 2005.  In 
addition, DGBAS lowered its estimate for real growth in 2005 
to 3.63% from the 4.21% predicted in February this year. 
Nevertheless, a stronger local currency partly offset the 
impact of higher energy prices and kept inflation fairly 
stable.  Private investment increased and unemployment 
continued to decline.  Business circles are optimistic about 
future prospects.  Local economists anticipate both exports 
and manufacturing production to pick up momentum in the 
second half of this year. 
 
3.  FRF Funds Increased, But Not Enough 
    ----------------------------------- 
 
 The Legislative Yuan (LY) passed legislation to increase 
funding for the Financial Reconstruction Fund (FRF), 
equivalent to RTC in the United States, to NT$250 billion by 
NT$110 billion.  FRF must designate specific banks prior to 
July 10 that would be eligible to receive FRF funds.  Three- 
quarters of the additional funding has already been 
designated for specific purposes, leaving only NT$29.5 
billion available for the FRF's discretionary use.  This 
amount is considered insufficient to address the seven 
problem financial institutions (including four banks) that 
have already been identified by the authorities.  It is 
likely that there are additional banks that still do not 
meet minimum capital adequacy requirements set by the 
government. 
 
4.  Plans to Relax Cross-Strait Investment Restrictions 
    --------------------------------------------- ------ 
 
Taiwan's Ministry of Economic Affairs (MOEA) Investment 
Commission revealed that Taiwan is considering raising the 
restrictions on the amount of capital Taiwan firms can 
invest in the Mainland.  The proposed reform would allow any 
firm to invest up to 40 percent of the firm's net worth in 
the PRC regardless of the firm's size.  Large Taiwan firms 
are now subject to a sliding scale restriction of 20 to 40 
percent of net worth depending on the size of the firm. 
According to the current regulations, large firms are 
allowed to invest up to 40 percent of their net worth for 
the first NT$ 5 billion (USD 160 million); 30 percent of net 
worth between NT$ 5 billion and NT$ 10 billion (USD 320 
million); and 20 percent of net worth over NT$ 10 billion. 
Small and medium enterprises are limited to investment of up 
to NT$ 80 million (about USD 2.5 million).  Many Taiwan 
firms have reached the ceiling limit.  The move is aimed at 
preventing those firms from underreporting or listing on 
overseas stock markets, such as Hong Kong, in order to avoid 
the restrictions.  Mainland Affairs Council (MAC) Economics 
Department Director Fu Don-cheng told AIT/T that MOEA's 
proposal would require further consideration and supporting 
measures that could delay implementation. 
 
  4.   ICPI Discusses Pharmaceutical Pricing and Reform 
    --------------------------------------------- --- 
 
AIT joined Academia Sinica, the Taiwan Department of Health, 
the International Research Pharmaceutical Manufacturer's 
Association and others to organize the international 
Conference on Pharmaceutical Innovation (ICPI), a two day 
academic seminar which included presentations by the world's 
leading health economists from the US, Japan, Australia, 
Canada, Korea, Europe and Taiwan.  Participants discussed 
the problems facing Taiwan's National Health Insurance (NHI) 
system, the value of innovative pharmaceuticals in achieving 
positive health outcomes, how to appropriately reimburse for 
pharmaceuticals, and healthcare reform experiences in Korea 
and Japan.  The conference was notable in that it was the 
first open discussion of the need for and process of 
healthcare financing reforms.  The attendance of so many 
internationally renowned health economists assured that the 
conference results received high-level attention from DOH 
and the Council for Economic Planning and Development. 
 
5.  HIV/AIDS Infections Skyrocket 
    ----------------------------- 
 
The number of HIV/AIDS infections in Taiwan has skyrocketed 
over the past year.  In fact, with 1,606 new cases in 2004, 
the new infection rate was 77 percent higher than in 2003. 
The primary cause of the spike in cases is the increased 
number of infections among intravenous drug users.  Within 
the IV drug group, the number of new infections among 
criminals and females is particularly notable. 
PAAL