US embassy cable - 05TAIPEI4029

UNCLAS SECTION 01 OF 03 TAIPEI 004029 
 
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 
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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, Cross Strait Economics, ESTH, Foreign Policy 
SUBJECT:  Economic Briefing for September 2005 
 
1.  This cable summarizes selected recent economic events in 
Taiwan in September 2005: 
 
--Overview:  Oil prices dampen growth 
--Strikes stymie Taiwan's financial reform 
--Avian flu alert 
--Cross-Strait exchanges increase 
--Taiwan attempts WTO consultations with China 
--RMB appreciation affects Taiwan firms 
--Economic relationship with Vietnam 
--China Shipbuilding Corporation to privatize 
 
Higher Petroleum Prices Dampen Growth 
------------------------------------- 
 
2.  The recent sharp, sustained increase in oil prices from 
less than US$50 per barrel early this year to above US$70 in 
late August has dampened Taiwan's economy.  Higher oil 
prices in the first eight months of 2005 pushed up Taiwan's 
oil import costs by 50%.  This increase, together with the 
continuing offshore relocation of Taiwan manufacturing and 
flagging demand from the United States, Japan, and Europe, 
cut Taiwan's trade surplus by 80%, and almost eliminated 
Taiwan's balance of payments surplus in the first half of 
2005.  Inflation in August reached 3.56%, the highest level 
in the past 44 months, prompting Taiwan's Central Bank of 
China to raise its benchmark interest rate by 0.125 
percentage points in mid-September.  Higher oil prices, 
coupled with higher interest rates for the US dollar (USD) 
than for the NT dollar (NTD), caused the NTD to depreciate 
six percent from early March to late September, and Taiwan's 
stock market to fall seven percent during July-September. 
Local economists estimate that higher oil prices could 
reduce Taiwan's 2005 economic growth by 0.1-0.15 percentage 
points to around 3.5%.  Nevertheless, Taiwan's government 
predicts higher export growth in the last quarter of this 
year when depleted inventories in developed nations will 
stimulate demand for Taiwan-made products, particularly IC 
and other electronic goods. 
 
Effects of RMB Appreciation on Taiwan 
------------------------------------- 
 
3.  On September 20, the Board of Foreign Trade sponsored a 
seminar to discuss the effects of the RMB appreciation on 
Taiwan.  The RMB appreciation may blunt the competitive edge 
of Taiwan companies based in China.   Taiwan's Chinese 
National Federation of Industries (CNFI) believes that the 
RMB appreciation may force China to upgrade to compete more 
on quality rather than just price.  CNFI will encourage 
Taiwan enterprises to merge or ally with multinational 
corporations and to explore opportunities outside of China. 
Major foreign investment banks including Deutsche Bank, 
Credit Suisse First Boston, ABN AMRO and JP Morgan expect 
that the RMB will appreciate further over the next two 
years. 
 
Labor Stymies Financial Reform 
------------------------------ 
 
4.  On September 9, three financial holding companies bid 
for state-owned shares of Business Bank of Taiwan (BBT), a 
key step in Taiwan's second-stage financial reform. 
However, about 36% of BBT employees staged a strike the day 
prior to the bidding.  The strike lasted four days, drove 
BBT share price down by 15%, and forced the government to 
stop the sale.  Opposition party legislators joined BBT 
employees to demand the government stop selling off BBT 
equity.  The protests led to the resignation of BBT Chairman 
Chung Su-sheng, and the new Chairman, Chang Chao-shuen, 
promised not to sell any more of the state-owned equity in 
BBT.  At present, the government controls 43.65% of 
ownership in BBT, which is one of Taiwan's top ten banks in 
assets. 
 
Taiwan Steps up Alert against Avian Flu 
--------------------------------------- 
 
5.  On September 22, Taiwan's Council of Agriculture (COA) 
issued an avian flu alert in anticipation of migratory birds 
arriving from Siberia, where H5N1 has spread from Southeast 
Asia.  The COA will conduct an inter-ministerial anti-flu 
exercise in mid-October.  Taiwan's Department of Health 
(DOH) has come up with a five-year avian anti-flu program 
that will require NT$30 billion in funding.  The DOH will 
stock 23 million masks and 5 million sets of protection 
gear.  It will seek to procure sufficient Tamiflu to treat 
ten percent of the population.  The DOH will begin a 
separate seven-year flu vaccine self-sufficiency program 
that will earmark NT$500 million for development of 
technology and another NT$1.5 billion to subsidize vaccine 
production.  The government will budget NT$4 billion for 
procurement of flu vaccine each year. 
 
Cross-Strait Two-way Travel Increases 
------------------------------------- 
 
6.  Cross-strait travel in the first half of 2005 continued 
to grow with 71,683 entries into Taiwan from China, up 3.3% 
from a year earlier.  This included 9,766 persons coming for 
marriage (up 200%), 3,735 persons for permanent residence 
(up 383%), and 27,576 persons for short visits (down 34%). 
As of June 2005, Taiwan has officially approved 158,000 
mainland Chinese for permanent residence in Taiwan.  From 
1987 to June 2005, over 1.2 Mainland Chinese have visited 
Taiwan, for social, cultural, and economic activities, as 
well as tourism.  According to China's statistics, the 
number of people from Taiwan visiting China in the first six 
months of this year grew 18.7% from a year ago to 2.01 
million entries, sending the cumulative number of Taiwan 
visits to 36 million.  There are nearly one million Taiwan 
people living in China. 
 
Taiwan Attempts to Consult with China under WTO 
--------------------------------------------- -- 
 
7.  Taiwan's International Trade Commission (ITC) will 
submit an import relief and industrial defense case to the 
WTO and request consultations with China.  On September 19, 
the ITC accepted a petition from the Yunlin County Towel 
Association complaining that a sharp increase in towel 
imports from China had injured its member companies.  Cotton 
towel imports from China in 2004 totaled 6,800 metric tons, 
84% more than the 3,700 metric tons in 2002. 
 
Taiwan Signs Agreement on Vietnam's WTO Accession 
--------------------------------------------- ---- 
 
8.  During her trip to Vietnam to attend bilateral trade and 
economic consultations in early September, Taiwan's Economic 
Minister Ho Mei-yueh signed a bilateral agreement on 
Vietnam's WTO accession.  The agreement will lower import 
tariffs on Taiwan products, and reduce tariff rates for some 
200 products whose Vietnam import duties average 45.25%. 
Minister Ho also signed a Taiwan-Vietnam Trade Agreement and 
a Memorandum on Standardization, Weights and Measurement 
Assessment.  In addition, Taiwan and Vietnam agreed to 
support each other to join the ATA Carnet Agreement system 
(designed to facilitate trade promotion by quick custom 
clearance and tariff exemption for exhibition products). 
Taiwan is the largest source of Vietnam's foreign 
investment, and over 80% of Taiwan's projects are in labor- 
intensive industries such as textiles, garments, footwear, 
and furniture.  Taiwan's cumulative investment in Vietnam as 
of August 2005 totaled US$7.6 billion.  Taiwan had been 
Vietnam's third largest trading partner (after Japan and the 
United States) until 2003 when China overtook Taiwan. 
 
Privatization of China Shipbuilding Corporation (CSC) 
--------------------------------------------- -------- 
 
9.  The Ministry of Transportation and Communications (MOTC) 
plans to privatize the 99% government-owned CSC prior to the 
end of December 2005.  The deadline to submit bids is 
October 17.  There will be a one-week bidder qualification 
review following the deadline.  Each bidder is required to 
pay a NT$30 million guaranty deposit, and have minimum 
capital of NT$500 million.  The bid winner may neither close 
any CSC shipbuilding yards nor transfer management and 
ownership to others within five years.  Funding to acquire 
CSC may not come from China.  Two large local shipping 
companies (i.e., Wanhai Marine Transport Company and Yang 
Ming Marine Transport Corporation) and China Steel 
Corporation will reportedly form an alliance to bid.  [Note: 
The Taiwan government owns a significant, but less than 50% 
share in both China Steel and Yang Ming.] 
 
KEEGAN