US embassy cable - 05TAIPEI2741

UNCLAS SECTION 01 OF 02 TAIPEI 002741 
 
SIPDIS 
 
 
SENSITIVE 
 
STATE PLEASE PASS AIT/W AND USTR 
 
STATE FOR EAP/RSP/TC, EAP/EP AND EB/IFD/OIA 
 
USTR FOR Audrey Winter and Tim Wineland 
 
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 
SUBJECT:  TAIWAN DISCOURAGES EXCHANGE RATE SPECULATION 
 
 
1.  (U) Summary.  Taiwan's Central Bank of China (CBC) is 
trying to discourage exchange rate speculation on the new 
Taiwan dollar (NTD) by administrative measures and a 
campaign suggesting that, based on economic fundamentals, 
the NTD should not appreciate against the US Dollar (USD). 
Some US$8 billion may have come to Taiwan in anticipation 
that appreciation of the Renminbi could prompt the NTD to 
gain strength.  Nevertheless, on June 23, the NTD gained NTD 
3.5 cents to close at NTD 31.35/US$1.  End Summary. 
 
Small Trade Surplus & Large Tourism Outflow 
------------------------------------------- 
 
2.  (U) Local newspapers reported June 23 that CBC suggests 
that the NTD should depreciate, rather than appreciate, 
against the USD.  CBC distributed trade and selected balance 
of payments data to support its conclusion that the NTD 
should not be grouped with other (Asian) currencies likely 
to appreciate relative to the USD.  The CBC distributed a 
statistical table comparing Taiwan's 2005 trade surplus with 
the trade surpluses recorded by four other major trading 
economies in East Asia.  The table showed the following 
trade surpluses (in million US$) for the first five months 
of 2005: 
 
Taiwan            549 
Japan          34,599 
China          30,064 
South Korea    10,323 
Singapore       6,079 
 
CBC officials also told the press that Taiwan residents' 
offshore travel spending in the first five months of 2005, 
estimated at US$3,000 million, is much higher than the five- 
month trade surplus of US$549 million. 
 
Economic Fundamentals Don't Support Strong NTD 
--------------------------------------------- - 
 
3.  (SBU) Market participants tell AIT/T that the CBC is 
trying to make the case that economic fundamentals, in this 
case a small trade surplus and huge offshore travel 
spending, indicate that the NTD is not in such a strong 
position.  In addition, Taiwan's foreign direct investment 
(FDI) account regularly posts a large deficit.  (Note: 
Taiwan's FDI account in the balance of payments accounting 
has regularly posted large deficits for several years. 
Taiwan's overall services account in the Balance of Payments 
table for the first quarter of 2005 shows a net outflow of 
about USD 1 billion.  End note.) 
 
Speculative Money in Taiwan 
--------------------------- 
 
4.  (U) Despite CBC's description of the economic 
fundamentals, there has been upward pressure on the NTD. 
According to newspaper reports, the CBC has attempted to 
maintain a stable NTD exchange rate over the past several 
months even though foreign portfolio investors continue to 
post net stock purchases.  According to trading records 
compiled by the Taiwan Stock Exchange, foreign portfolio 
investors' net stock purchases in the first 22 days of June 
2005 totaled NT$98.8 billion (or US$3.1 billion at the 
exchange rate of NT$31.3 per USD). 
 
5.  (SBU) AIT/T understands that Taiwan officials believe 
that a significant part of these foreign portfolio 
investment inflows are speculative.  Anticipating 
appreciation of China's Renminbi, which might prompt the NTD 
to gain strength, foreign investors have deposited "hot 
money" in interest-free checking accounts.   Anticipated NTD 
appreciation would bring handsome profits that would more 
than cover an apparent interest-rate loss caused by parking 
funds in Taiwan checking accounts.  Funds now in interest- 
free accounts in Taiwan could otherwise be earning 3% from 
bank deposits in the Unites States. 
 
CBC Calls 
--------- 
 
6.  (SBU) Estimates are that hot money in Taiwan is about 
NT$170-180 billion (US$5.4-5.7 billion at the exchange rate 
of NT$31.3 per USD).  This amount is down from previous 
estimates of NT$260 billion (US$8.3 billion).  The CBC 
recently began expressing its "concern" over the 
accumulation of funds in interest-free accounts by 
contacting fund managers if funds remaining parked in bank 
accounts for more than a month.  Despite such actions by the 
CBC, market participants say that investors continue to park 
large amounts in accounts and only use a small portion for 
trading in the stock market. 
 
COMMENT 
------- 
 
7.  (SBU) The CBC clearly remains concerned about the 
quantity of what it views as speculative funds parked in 
Taiwan.  It has stepped up its efforts to discourage 
speculative funds by administrative actions (phone calls to 
fund managers) and now a public campaign suggesting that, if 
anything, the NTD is overvalued rather than undervalued. 
However, the market, probably looking at the broader 
economic fundamentals, delivered its judgment by continuing 
to buy the NTD, pushing it up 3.5 NT cents to close June 23 
at NT$31.35 per USD.  End Comment. 
 
PAAL