US embassy cable - 05TAIPEI3667

UNCLAS SECTION 01 OF 03 TAIPEI 003667 
 
SIPDIS 
 
STATE PLEASE PASS AIT/W AND USTR 
 
STATE FOR EAP/RSP/TC, EAP/EP 
 
USTR FOR WINTER AND WINELAND 
 
USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER 
USDOC FOR 3132/USFCS/OIO/EAP/ADAVENPORT 
TREASURY FOR OASIA/LMOGHTADER 
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, Finance 
SUBJECT:  Economic Briefing for August 2005 
 
 
1.  This cable summarizes selected recent economic events in 
Taiwan in August 2005: 
 
--Poor economic performance 1H, mixed expectations 2H 
 
--The CBC's ensures BOP surplus in Q2 
 
--Chunghwa Telecom privatized amid opposition 
 
--Taiwan attempts to cut budget deficit 
 
--GE first foreign company to acquire/operate local bank. 
 
--Transportation ban hurting Taiwan air/sea firms 
 
--Taiwan reinforces Strait Exchange Foundation 
 
--First shipment of duty-free Taiwan fruits in China. 
 
Mixed Expectations for Taiwan's Economy 
--------------------------------------- 
 
2.  The island's economy performed poorly in the first seven 
months this year; economists hold mixed expectations for the 
rest of the year.  Manufacturing production leveled off in 
the first half and posted a y-o-y decline of 1.3% in July. 
Unemployment rose to a 10-month high of 4.3%.  Export growth 
in July 2005 declined to 5% from 26% a year ago, and import 
growth dropped from 33% to 10%.  Higher oil prices 
contributed to a plunge of 62.5% in Taiwan's July 2005 trade 
surplus to US330 million, inflation rose to 2.37%, the 
second highest rate in the past nine months, and the NT 
dollar fell by 11% against the US dollar during March - 
August.  Taiwan authorities hope the weak currency will 
stimulate exports, increase industrial production, and boost 
economic growth above 4% in the second half of this year. 
However, private observes note that higher oil prices are 
dampening world demand and will continue to combine with 
industrial relocation to slow Taiwan's export sector. 
Economists estimate that every ten-percent rise in petroleum 
prices will reduce Taiwan's economic growth by 0.14 
percentage points. 
 
Short-term Liability Sustained BOP Surplus in Q2 2005 
--------------------------------------------- -------- 
 
3.  Taiwan's balance of payments (BOP) in Q2 of 2005 posted 
a surplus of US$6.45 billion, pushing foreign exchange (FX) 
reserves to US$253.62 billion.  The BOP would have run a 
deficit if Taiwan's Central Bank of China (CBC) had not 
increased its short-term liabilities through repurchase 
agreements using its stock of U.S. bonds.  The island's 
current account (C/A) recorded a negligible surplus in Q2, a 
five-year low. 
 
Privatization of Chunghwa Telecom Corporation (CTC) 
--------------------------------------------- ------ 
 
4.  In spite of objections from labor unions and opposition 
party legislators, the Ministry of Transportation and 
Communications (MOTC) successfully privatized CTC in August 
2005.  Government ownership in CTC was reduced from 65% to 
44%.  Three percent of CTC shares were sold to local 
individuals through auction on August 9, and 13.9% to 
foreign investors through issuance of American depository 
receipts (ADRs) on August 10.  The MOTC sold another four 
percent of CTC shares to CTC employees on August 29.  The 
ADR was priced at a 3.01% discount from the level of 
US$19.57 prevailing at that time, and the purchase requests 
were about six times the volume available for sales. 
Taiwan Attempts to Cut Budget Deficit by One-third 
--------------------------------------------- ----- 
 
5.  In late August, Taiwan's Executive Yuan submitted its 
2006 central budget proposal to the Legislative Yuan for 
consideration.  Through planned privatizations in 2006, the 
government projects an almost one-third cut in its budget 
deficit.  It hopes within five-year program to produce a 
balanced budget.  Taxes remain the main source of revenue. 
Science and technology funding will grow 22%.  Part of the 
funding of the 15-year special defense budget (blocked by 
the opposition parties for the past two years) is 
incorporated in the 2006 regular budget proposal.  The 2006 
budget proposal also includes funding for the 2009 World 
Games in Kaohsiung, southern Taiwan.  According to the 
budget proposal, the deficit and the debt service payments 
of NT$65 billion in 2006 will produce a fiscal deficit of 
NT$260.7 billion (US$8.1 billion), sending the government's 
total outstanding debt to NT$3,920 billion (US$122.5 
billion) or 37% of GNP, still below the statutory 40% limit. 
 
GE Capital to Acquire Local Bank 
-------------------------------- 
6.  In Mid-July 2005, the Fair Trade Commission permitted GE 
Capital, a subsidiary of General Electric, to acquire 33-49% 
equity in Cosmos Bank.  A month earlier, the Cosmos Bank 
shareholders conference approved a plan to issue 729 million 
new shares (equivalent to 29% of total equity) though 
private placement to facilitate GE Capital's acquisition of 
a majority of equity.  The case is still pending for 
approval of the Financial Supervisory Commission.  GE 
Capital will become the first foreign company to directly 
operate a local bank in Taiwan. 
 
Ban Hurting Taiwan's Air/Sea Transportation Firms 
--------------------------------------------- ---- 
 
7.  A ban on direct cross-Strait transportation is hurting 
and marginalizing Taiwan's transportation enterprises. 
China has been gradually building its links with the world 
over recent years, and foreign airlines and shipping 
companies are bypassing Taiwan to deal with China directly. 
FedEx, UPS, and DHL, the top-three express delivery 
companies in the world, are building transshipment hubs in 
China and cutting flights to Taiwan.  Monthly cargoes loaded 
and unloaded at CKS Airport, have dropped 30% from 12,000 
tons five years ago to 8,000-9,000 tons estimated for this 
year.  The world ranking of Kaohsiung Harbor has also fallen 
from third to sixth, and the harbor has cut the number of 
stevedores from 10,000 to 3,700. 
 
Efforts to Reinforce SEF Functions 
----------------------------------- 
 
8.  Taiwan's government is trying to strengthen the Strait 
Exchange Foundation (SEF).  Former DPP Secretary General 
Chang Chun-hsiung has been appointed SEF Chairman, and 
Mainland Affairs Council Vice Chairman Michael You as SEF 
Secretary General.  Both Chang and You have close contact 
 
SIPDIS 
with President Chen Shui-bian.  On August 30, the SEF set up 
the Taiwan Investors Service Center in Taipei to help Taiwan 
businesses in China.  In addition, President Chen and 
Premier Frank Hsieh promise to grant SEF an annual subsidy 
of NT$100 million beginning 2006.  Currently, the SEF's 
annual funding requirement of NT$200 million comes from the 
SEF's own resources.  The PRC has downplayed the SEF's role 
in cross-Strait consultations by utilizing Taiwan's 
industrial associations. 
 
Xiamen Sees First Shipment of Duty-free Fruits from Taiwan 
--------------------------------------------- ------------- 
 
9.  On August 25, the first shipment of duty-free fruits 
from Taiwan's Kaohsiung Harbor arrived in Xiamen, a port 
across the Strait from Taiwan, for transfer to other 
mainland cities.  After passing a quarantine process, the 
fruits weighing 6.37 metric tons were immediately sent to 
Zhongpu Fruit Wholesale Market of Xiamen from where sales 
agents transshipped them to retail shops in Hangzhou, 
Shanghai, and Beijing.  Xiamen Chengxingtai Import and 
Export Company, the importer of the shipment, plans to 
import eight shipments of Taiwan fruits (of 40 metric tons) 
through Xiamen every month, beginning September.  The PRC 
has scrapped import tariffs on 15 categories of Taiwan 
fruits, including pineapples, chrimoyas, pawpaws, 
carambolas, mangos, guavas, wax-apples, pinangs, grapefruis, 
jujubes, coconuts, loquats, plums, peaches, and persimmons. 
 
KEEGAN