US embassy cable - 05TAIPEI4336

C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 004336 
 
SIPDIS 
 
DEPT PASS TO AIT/W AND USTR 
 
E.O. 12958: DECL: 10/25/2020 
TAGS: ECON, PINR, PREL, KCRM, TW 
SUBJECT: TAIWAN DPP LEGISLATORS ON FINANCIAL REFORM 
 
REF: A. TAIPEI 3880 
 
     B. TAIPEI 2984 
 
Classified By: AIT ACTING DIRECTOR DAVID KEEGAN, REASON 1.5 B/D 
 
1.  (C) Summary: At an AIT-hosted lunch on October 20, two 
DPP Legislators criticized the "arbitrary" deadlines and cuts 
in the number of financial institutions the Chen 
Administration has called for in Taiwan's second stage of 
financial reform, but they strongly supported the overall 
goals of enhancing the competitiveness of Taiwan's financial 
sector.  The Legislators both acknowledged that some 
allegations of corruption within the ruling DPP may be true, 
and this made restoring public trust in government officials 
among the most serious challenges that President Chen and his 
administration face.  The Legislators also discussed 
cross-Strait banking, Taiwan's economic future, the 
opposition party blocking government privatization plans, and 
views of the year-end Taiwan election.  End summary. 
 
2.  (C) AIT/DDIR Keegan hosted a lunch on October 20 for 
Legislators Chuang suo-hang and Chiang Chao-yi, two DPP 
members of the Financial Legislative Enhancement Consortium 
(an LY in-house forum founded and headed by PFP Legislator 
Christina Liu Yi-ju, ref a) to discuss some of the financial 
and economic issues now facing Taiwan and the Legislative 
Yuan (LY).  AIT was particularly interested in learning how 
members of the ruling DPP viewed their membership in an 
organization led by one of the most vocal critics of the Chen 
Administration's economic policies. 
 
Second Stage of Financial Reform 
----------------------------------------- 
 
3.  (C) Both Legislators said they thought some of the 
criticisms of Taiwan's "second stage financial reforms" were 
justified and singled-out the arbitrary deadlines and 
arbitrary goals of reducing by half the number of state-owned 
banks and financial holding companies (FHCs).  "Why reduce 
the FHCs from 14 to seven?" Dr. Chuang asked, "Why not four? 
Why not 10?"  However, both legislators agreed with the 
importance of taking measures to improve the overall 
competitiveness of Taiwan's financial institutions.  (The 
views they expressed closely echoed the views Christina Liu 
expressed ref a.) 
 
Taiwan's Rich Families 
----------------------------- 
 
4.  (C) However, Dr. Chuang said he did not agree with 
widely-publicized opposition party criticism that bank 
consolidation benefited mainly a few wealthy families that 
support President Chen, and that the process was intended to 
create opportunities for graft.  According to Chuang, 
participation of Taiwan's wealthiest families is required in 
the bank consolidation process because only these families 
possessed the resources to buy shares and the capability to 
operate and manage the state-owned banks.  Chuang said the 
unfair allegation that these families have been colluding 
with the Chen Administration reflected the still dominant KMT 
control over Taiwan media outlets.  Chuang noted that the 
Tsai family, owners of the Fubon Financial Holdings and cited 
 
SIPDIS 
in the press as one of the three rich families benefiting 
from privatization, was, in fact, very close to KMT Taipei 
City Mayor Ma Ying-jeou.  Yet, he continued, no news media 
have criticized the Taipei City Government for selling the 
Taipei Bank to Fubon.  Chuang also noted that the Koo family 
(another of the frequently cited three rich families) holds 
an important position on the KMT Central Standing Committee. 
 
State-owned Enterprises (SOEs) 
--------------------------------------- 
 
5.  (C) Legislators Chuang and Chiang were both surprisingly 
open to the possibility that press reports about corruption 
within the Chen Administration were true.  Dr. Chuang 
attributed government corruption to the system inherited from 
the days of one-party KMT rule.  According to Chuang, 
President Chen had tried to be politically neutral when he 
decided to keep Wang Chung-yu on as the China Steel 
Corporation (CSC) Chairman after the 2000 election.  However, 
in the next election, Wang openly used CSC funds to campaign 
for KMT candidates.  After leaving CSC, Wang was appointed a 
KMT legislator at large.  Since then, the President has 
tended to appoint people he knows and trusts to head SOEs. 
Chuang said that while economic policies can be politically 
neutral, the appointment of top SOE executives always 
involved political party considerations.  In general, under 
the Chen Administration SOE performance has improved and more 
were reporting profits, including Taiwan Salt and China 
Shipbuilding.  Most SOEs lost money under the KMT rule, 
according to Chuang. 
 
6.  (C) Legislator Chiang noted that the government supports 
allowing major private shareholders to run "privatized" 
enterprises (those with government ownership below 50%) even 
though the government still controls more equity than any 
single private shareholder.  An example of this is the 
Taishin Financial Holding acquisition of Changhwa Commercial 
Bank, where managerial control over Changhwa was given to 
Taishin.  However, media and opposition party legislators 
have attacked this kind of arrangement as "corruption." 
Chiang said that the best way to address the accusations and 
appearance of SOE-related corruption is through 
privatization, so the government can avoid involvement in 
business operations, and conflict between regulator and 
operator functions.  Unfortunately, he said, at present, 
labor unions and opposition party legislators have united to 
strongly oppose privatization.  The opposition parties 
managed to pass a non-binding resolution opposing the sale of 
any government-owned shares, Chiang observed.  He added that 
during the review of the 2006 budget proposal, opposition 
parties cut to zero the proposed revenue from sales of equity 
in SOEs.  This prevented the government from planned further 
privatizing of SOEs. 
 
Corruption of Financial Officials 
--------------------------------------- 
 
7.  (C) Chiang said he believed that Taiwan Stock Exchange 
(TSE) Chairman Wu Nai-jen and Financial Supervisory 
Commission (FSC) Chairman Kong Jaw-sheng should step down 
because of their association with the "vulture" insider 
trading scandal that erupted in December 2004 (ref b). 
Chiang said he suspected that these two officials were 
directly involved in the scandal, as well as Examination 
Bureau DG Lee Chin-chen. (Taiwan media reported that DG Lee 
was indicted on October 24.)  He noted that recently a 
mid-level TSE official with close ties to Wu Nai-jen was 
arrested and charged with leaking information on confidential 
investigations. 
 
8.  (C) Both Chiang and Chuang complained that FSC Chairman 
Kong has been slow and ineffective in addressing the scandal. 
 According to Chiang, FSC Chairman Kong tried to stymie 
investigation by the prosecutor's office in favor of an 
in-house investigation.  After the in-house investigation was 
complete, Kong declared that no wrong-doing had been found. 
Chiang claimed the FSC investigation was seriously flawed and 
not convincing.  In addition, Chiang criticized FSC Chairman 
Kong and Vice Chairman Lu Tung-ying for weak leadership. 
Chiang said that both Kong and Lu fail to manage the FSC 
commissioners and other staff.  He said he believed the Chen 
Administration should replace these two officials as soon as 
possible. 
 
Cross-Strait Banking and Internationalization 
--------------------------------------------- ---------- 
 
9.  (C) In their sole retreat to the DPP party line, 
legislators Chiang and Chuang both expressed strong 
opposition to lifting restrictions on Taiwan banks setting up 
branches or subsidiaries in China.  They contended that doing 
so would speed-up the process of Taiwan's "hollowing out." 
However, they do not oppose internationalization, at least in 
terms of Taiwan banks setting up branches in countries other 
than China.  Legislator Chiang attributed China's rapid 
economic development to the relocation of much of Taiwan's 
manufacturing industry to China over the past 15 years. 
Without the massive investment from Hong Kong and Taiwan, 
Chiang believes that China's economic development would have 
been much slower.  However, in spite of the investment, 
Chiang complained, China remains very hostile to Taiwan. 
 
10.  (C) According to Chuang, once Taiwan banks set up 
offices in China, a large number of Taiwan companies will 
follow in the banks' footsteps.  These companies will even 
relocate their headquarters to China.  For the time being, 
some companies still keep their headquarters in Taiwan simply 
because they use the banks here for financing.  It is still 
difficult for Taiwan companies in China to obtain loans from 
Chinese or foreign banks there. 
 
Relationship with PFP Legislator Christina Liu 
--------------------------------------------- ------- 
 
11.  (C) The two DPP legislators explained that they joined 
the Financial Legislation Enhancement Consortium partly 
because Liu is one of the top economists in Taiwan and partly 
because Chuang and Liu studied together at National Taiwan 
University, and have remained close friends. 
 
Year-End Elections 
----------------------- 
 
12.  (C) Legislators Chuang and Chiang both expressed concern 
that the DPP will have a hard time winning county magistrate 
elections in Changhwa and Pingtung.  They speculated that the 
person most likely to succeed President Chen is Presidential 
Office Secretary General Yu Shyi-kun. 
13.  (C) With the exception of toeing the DPP party line on 
Taiwan banks operating in the PRC, Chuang and Chiang showed 
an unusual willingness for Taiwan politicians to offer policy 
assessments without regard for political allegiances. 
KEEGAN