US embassy cable - 05TAIPEI4187

C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 004187 
 
SIPDIS 
 
DEPT PASS TO AIT/W AND USTR 
DEPT FOR EAP/TC, EAP/EP, EB/IFD/OIA, AND EB/IFD/OMA 
TREASURY FOR OASIA MOGHTADER AND OCC AMCMAHON 
TREASURY ALSO PASS TO FEDERAL RESERVE BOARD OF GOVERNORS, 
SAN FRANCISCO FRB AND NEW YORK FRB 
 
E.O. 12958: DECL: 10/14/2020 
TAGS: EFIN, PREL, PINR, TW 
SUBJECT: TAIWAN FINANCIAL REFORM BECOMES POLITICAL CONTEST 
 
REF: A. TAIPEI 2131 
 
     B. TAIPEI 3288 
     C. TAIPEI 3880 
 
Classified By: AIT DIRECTOR DOUGLAS PAAL, REASON 1.5 B/D 
 
1.  (C) Summary: Taiwan's second stage financial reforms have 
become the subject of a heated political contest and media 
debate.  Opposition parties have been able to capitalize on 
misgivings raised by labor union opposition to privatization 
and an opaque bidding process as an effective way to cast 
suspicion on the Chen Administration's motives and integrity. 
 Within the past two weeks, President Chen and other senior 
officials have repeatedly tried to defend the reforms, but 
public mistrust of government institutions and officials is 
growing in the face of almost daily media reports of official 
corruption and misuse of power.  End summary. 
 
The Second Stage of Financial Reform 
------------------------------------ 
 
2.  (C) The announced goals of the second stage of Taiwan's 
financial reform are to reduce the number of state-owned 
banks from 12 to 6 by the end of 2005, to reduce the number 
of financial holding companies (FHCs) from 14 to 7 by the end 
of 2006 and to sell controlling interest in a state-owned 
bank to a foreign bank by the end of 2005.  When President 
Chen announced the second stage reforms on October 20, 2004, 
it was with pride in the success of the first stage of reform 
in lowering non-performing loan (NPL) levels among Taiwan 
banks (from a high of 11.7% in March 2002 to below 2% at 
present), and confidence in the unassailable virtue of the 
goals.  After all, both international and Taiwan think tanks 
had for years been calling for privatization of state-owned 
banks, reduction of the number of banks, and introduction of 
foreign managerial expertise.  Administration officials hoped 
that after reducing the number of banks and FHCs, the 
remaining ones would be more profitable and have sufficient 
scale to compete with large foreign banks.  Financial 
officials have consistently, confidently, and convincingly 
explained to AIT that achieving these goals is necessary if 
Taiwan is to play any significant role in regional finance. 
 
Sale of CCB 
----------- 
 
3.  (C) In mid-March 2005, in what Taiwan officials told AIT 
would be a "landmark case that would set the tone for future 
bank sales," two foreign bank consortia bid on a deal for 
controlling interest in the state-owned Changhwa Commercial 
Bank (CCB).  As reported ref B, the sale fell through when 
the two foreign consortia made offers substantially below the 
prevailing market price of CCB equity shares.  Post-bid 
negotiations between the Ministry of Finance and the foreign 
consortia that lasted until May were denounced by the bank 
labor union and opposition legislators as an un-patriotic 
discounted sale of public property to foreigners.  The 
failure to sell CCB not only was a serious blow to the reform 
plan, but also fueled public doubts about the motivations of 
government officials.  The sale of controlling interest in 
CCB was finally accomplished in late July when Taiwan's 
Taishin Financial Holding Company agreed to pay twice what 
the foreign consortia had offered.  Initially, this was 
widely interpreted as a big and surprising success for the 
reform program. 
 
4.  (C) However, as the details of the deal offered to 
Taishin were analyzed, it became apparent that Taishin had 
acquired control over Changhwa with virtually no risk to its 
own capital.  Media and opposition politicians expressed 
outrage at the selling of public assets to one of Taiwan's 
controlling financial groups, further enriching one of its 
richest pro-DPP families. 
 
Allegations of Corruption 
------------------------- 
 
5.  (C) One of the most vocal critics of the sale has been 
Peoples' First Party Legislator Dr. Christina Liu.  During a 
lunch address to AIT Junior Officers on October 12, Dr. Liu 
explained some of her criticisms of the Chen Administration's 
approach to financial reform.  She expressed the view that 
the second stage financial reform goals of cutting the number 
of banks and FHCs in half were both arbitrary and pointless. 
She told AIT that "Even if all Taiwan banks were merged into 
one that wouldn't automatically increase the competitiveness 
or profitability of the banks."  "Big doesn't necessarily 
mean good," she continued, "Look at Japan, which has three of 
the ten largest banks in the world, but which still are 
poorly run."  However, when pressed for her recommendations, 
she said the problem was not the goals, but the 
non-transparent (read corrupt) way they were being 
implemented.  She also said Taiwan banks had no chance of 
becoming competitive regionally as long as they were 
prevented from doing business in China. 
 
6.  (C) Dr. Liu strongly implied that the Chen Administration 
was pushing bank privatization for reasons of corruption and 
cronyism.  She noted that the number of state-owned banks was 
being reduced from 12 to 6 and speculated that the number 6 
was probably chosen in order to give each of Taiwan's three 
wealthiest families control of two of the privatized banks. 
She suggested that the ruling Democratic Progressive Party 
doubts its ability to stay in power after the 2008 elections 
and wants to take full advantage of its remaining time in 
control to profit financially.  However, she added, if the 
KMT had won the 2004 presidential election, it would probably 
have engaged in corruption as well. 
 
7.  (C) After her talk to the AIT Junior Officers, Dr. Liu 
privately confided to an Economic Officer that she believed 
Taiwan's First Lady, Wu Shu-chen, was personally involved in 
fixing the sales of state-owned assets for her own financial 
gain. 
 
Worthy Notions Employed for Unworthy Ends 
----------------------------------------- 
 
8.  (C) In light of the years of USG and Amcham Taipei urging 
privatization and financial reform as the path to continued 
prosperity, the notion that Taiwan's privatization of 
state-owned assets is motivated primarily to profit the 
President's cronies is jarring.  Yet, Dr. Liu, an extremely 
savvy economist who trained at the University of Chicago, has 
repeatedly alleged this to AIT and to the Taiwan media.  Not 
surprisingly, large numbers of Taiwan people without training 
in economics find the conspiracy theory more plausible than 
the economic one.  Other well-informed local contacts have 
echoed these views that the privatization of state-owned 
banks and other enterprises is being done in order to benefit 
a few wealthy, well-connected families; that the Chen 
Administration is trying to get the maximum financial benefit 
of its remaining time in power; and that corruption is the 
behavioral norm of government officials. 
 
Administration Challenged to a Public Debate 
-------------------------------------------- 
 
9.  (C) Opposition to the second stage of reforms has become 
a staple in media reporting.  On October 7, the legislative 
caucus of the opposition KMT publicly urged the government to 
suspend the plan, saying that the government first needs to 
clear public suspicions that the plan is favoring specific 
financial groups in the name of privatization.  After heated 
debate within the Legislative Yuan (LY) Financial Committee, 
the LY passed a non-binding resolution opposing the 
privatization of state-owned banks.  The KMT legislative 
caucus on October 11 challenged the Presidential Economic 
Advisory Group to publicly debate the reform plan, claiming 
that it will lead to Taiwan's financial industry being 
further dominated by a few wealthy families. 
 
President on the Defensive 
-------------------------------- 
 
10.  (C) The Chen Administration has been forced to defend 
its reform plans.  Among the points Taiwan President Chen 
Shui-bian made in his October 10 National Day address was a 
pledge to complete second-phase financial reforms as a 
priority task.  In recent days, this same pledge has been 
made by the Vice President, the Premier, the Vice Premier, 
the Minister of Finance, the Chairman of the Financial 
Supervisory Commission (FSC) and other high-ranking executive 
branch officials on an almost daily basis.  FSC Chairman Kong 
Jaw-sheng has insisted to the media that all of the second 
stage goals will be accomplished as scheduled and that 
"several" possible deals for foreign acquisition of a 
state-owned bank are nearing the final stages of negotiation. 
 Kong is currently leading a forum in New York October 13-14 
to brief prospective foreign investors on Taiwan's second 
stage financial reforms and its general investment 
environment and incentives for foreign investors. 
 
11.  (C) In a graphic illustration of the Administration's 
defensive posture on this issue, local newspapers on October 
7 pictured the Minister of Finance and the FSC Chairman 
sheepishly admitting during questioning by the LY Finance 
Committee that they had no idea how the specific numerical 
goals of the second stage of financial reform had been 
developed. 
 
Where There's Smoke 
------------------- 
 
12. (C) Dr. Lee Bin-Zheng (strictly protect), Professor and 
Chairperson of National Sun Yat-sen University Department of 
Political Economy recently told AIT/K that as a member of the 
Executive Yuan Consulting Committee for the Privatization of 
State-Run Enterprises, he was astonished to discover that 
participating bidders for the planned projects have already 
been selected and "outsiders" screened out; and although 
there is a complex bidding process, the outcome is 
pre-determined.  Dr. Lee noted that he is no longer a strong 
supporter of the DPP as he has lost his enthusiasm and 
confidence in the DPP. 
 
Comment 
------- 
 
13.  (C) Recent corruption and mismanagement scandals have 
amplified the disarray of the Chen Administration to the 
point where its ability to implement its economic policies is 
increasingly in doubt.  Blood is in the water and touted 
financial reforms are being attacked as instruments of 
corruption. 
 
14.  (C) For months, on an almost daily basis Taiwan's media 
have carried reports of organized crime activities and 
government corruption.  The sacking of two senior 
presidential advisors on October 5 for alleged corruption 
brought the problem into the President's office and 
highlighted the problems of cronyism and corruption within 
the ruling Party. 
 
15.  (C) While it is difficult to determine how much of the 
reporting on the seamy-side of Taiwan society is a creation 
of its free-wheeling media, how much is political 
mud-slinging, and how much is a true reflection of corrupt 
government institutions, perceptions may be as important as 
facts in feeding a growing public mistrust of politicians, 
government officials, and institutions. 
 
16.  (C) Chen's ability to implement the second stage 
financial reforms will be a litmus test of his 
administration's ability to rebuild public trust and govern. 
PAAL