US embassy cable - 05TAIPEI4461

UNCLAS SECTION 01 OF 03 TAIPEI 004461 
 
SIPDIS 
 
STATE PLEASE PASS AIT/W AND USTR 
 
STATE FOR EAP/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 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EINV, EFIN, ECON, PINR, TW 
SUBJECT:  Taiwan Stock Market Doomed? 
 
 
SUMMARY 
------- 
 
1.  On October 17, a prominent China Times article by a 
local political science professor described the Taiwan Stock 
Exchange (TSE) as having no future.  The article claimed 
that the growing number of de-listings and worsening 
performance indicated that TSE would cease to exist as a 
functioning market within ten years.  However, local 
economic analysts discount this bleak assessment and believe 
TSE remains attractive, as shown by high foreign portfolio 
 
SIPDIS 
investment inflows and the assessment of international 
ratings firms.  END SUMMARY. 
 
China Time's Weekly Column 
-------------------------- 
 
2.  On October 17 (Monday), the China Times carried a weekly 
column entitled "Dead Water Needs Live Water to Rescue" 
(pinyin: si shui yao hou shui yi)-a Chinese saying which, in 
this case, was used to emphasize the importance of new 
listings to stock market health.  The author, National 
Taiwan University Political Science Professor Chu Yun-han, 
is a vocal critic of the Taiwan government. 
 
3.  In his article, Chu Yun-han says Taiwan's stock market 
is doomed within ten years.  He states that poor stock 
market performance has dampened private consumption in 
Taiwan and brought long-term recession to the services 
sector.  Chu focuses on the accelerated outflow of capital 
and delisting from the market by a growing number of high- 
tech companies.  He says that the Hong Kong market has 
performed better than Taiwan's counterpart, with a higher PE 
ratio than Taiwan.  (Note: Economists do not generally 
consider PE useful for comparing the strength of markets.) 
Chu concludes that the only way to rescue the Taiwan market 
is to permit Taiwan business firms in China to list on the 
Taiwan Stock Exchange (TSE). 
 
4.  The basic trends behind Chu's gloomy prediction are 
simple.  The TSE declined January - October 27, 2005 by 
8.2%, while India's stock market index rose 16.4%, South 
Korea's index rose 27.3%, and Singapore's stock index rose 
6.1%.  In US dollar terms, the TSE decline through October 
27 was over 13%.  So far in 2005, there have been eight new 
TSE listings and 11 de-listings. 
 
SIPDIS 
 
Another View of Taiwan Stock Market 
----------------------------------- 
 
5.  Former National Securities Investment Consultant Company 
Chairman Huang Wen-jur told AIT he holds a much different 
opinion on the state of TSE.  He noted that published 
statistics show that the TSE stock index shot up 42% in 2003- 
2004.  Huang also noted that the Morgan Stanley Capital 
Index has repeatedly raised the weight given Taiwan shares 
over the past two years, and the World Economic Forum has 
ranked Taiwan the most competitive economy in Asia three 
years in a row, leading many foreign portfolio investors to 
invest in Taiwan. 
 
6.  BNP Paribas (Taiwan) Managing Director and Head of 
Corporate Finance Peter Kurtz told AIT that despite its poor 
performance this year, TSE has excellent potential.  He 
noted there was a decline in the number of listed companies, 
but attributed this not to de-listings, but to the lack of 
new companies listing.  He thought this was partly a residue 
of the excess number of companies created in the venture 
capital boom of the 1990s and partly due to Taiwan companies 
listing in Hong Kong or Shanghai instead of Taiwan.  Kurtz 
said that most of the companies most likely to consider new 
listings are the offshore holding companies of Taiwan's 
China-based operations, which are not currently permitted to 
list on the TSE. 
 
Higher Requirements Lead to Delisting 
------------------------------------- 
 
7.  There are other explanations for the leveling off of TSE 
listings.  Regulators have stepped up surveillance and 
accounting and financial statement requirements to 
international levels, posing significant challenges for some 
companies.  The TSE forced nine (of the 11 companies that de- 
listed so far this year) to de-list for failure to meet the 
higher requirements.  Taiwan companies listed on the Hong 
Kong market are few, and their trading volumes generally 
small.  All but two of the roughly 30 Hong Kong-listed 
Taiwan companies have virtually no turnover. 
 
Stock Prices and Cross-Strait Restrictions 
------------------------------------------ 
 
8.  Chu Yun-han and Peter Kurtz both partly attribute the 
poor TSE performance to restrictions on China-invested 
companies listing on the TSE.  Kurtz told AIT that beyond 
allowing China-invested companies to list on the TSE, Taiwan 
needed to lift all restrictions on Taiwan investment in 
China.  "Taiwan is closing itself off from the world's 
fastest growing economy," Kurtz said. 
 
9.  However, the view that these restrictions and the 
negatives trends in the TSE have had a major impact on 
Taiwan's economic vitality is undercut by the fact that 
Taiwan remains a major source of foreign direct investment 
in China and two-thirds of Taiwan's offshore investment goes 
to China. China takes over 25% of Taiwan's total exports and 
over 40% of export orders placed with Taiwan companies are 
filled by overseas production facilities (mostly in China). 
It is unclear how much effect removing the investment 
restrictions would have on Taiwan's stock market.  Taiwan 
companies might still continue to rely on their current 
sources of capital. 
 
10.  According to Huang Wen-jur, removing restrictions 
related to investment in China would facilitate Taiwan 
companies raising capital, but would also expose Taiwan's 
stock market to PRC manipulation.  He said the PRC already 
controls the Taiwan business associations in China by 
assigning people to fill key positions in these 
associations, who then put political pressure on association 
members and the Taiwan government.  He also noted that 
Taiwan's regulators have no way to supervise and examine 
Taiwan companies' operations in China. 
 
Taiwan Continues to Attract Foreign Investors 
--------------------------------------------- 
 
11.  The flow of foreign investor capital into Taiwan 
reached US$17 billion in 2004.  The capital inflow in the 
first half of 2005 more than doubled from a year ago to 
US$15 billion.  In Q3 of 2005, higher interest rates in the 
United States, coupled with higher oil prices, prompted some 
foreign portfolio investors to pull out funds from Taiwan 
and other Asian economies.  Nevertheless, the outward 
remittances were offset by a greater capital inflow.  (As of 
October 28 this year, net capital inflow to Taiwan totaled 
US$962.9 million, more than Thailand's net capital inflow of 
US$235.8 million and India's net capital inflow of US$79.6 
billion.  South Korea posted a net capital outflow of US$258 
million.) 
 
Closer Correlation between US and Taiwan Markets 
--------------------------------------------- --- 
 
12.  Taiwan's stock market performance correlates more to 
the New York stock exchange than to markets in the East Asia 
region because Taiwan is a major supplier of electronic 
products to U.S. firms.  Weaker demand in the United States 
due to higher inventories contributed to a decline of 2% in 
the Dow Jones stock price index and another decline of 1.1% 
in Nasdaq in the first nine months of this year.  During the 
same period, Taiwan's stock price dropped 0.3%.  Valuations 
of Taiwan companies' production operations in China more 
closely correlate with Hong Kong markets, and have been 
impacted by retrenchment policies in China. 
 
13.  Chairman Huang Wen-jur and other local analysts 
maintain that the decline in Taiwan stock market index this 
year has been caused by short-term factors, rather than by 
long-term factors.  Cross-strait investment restrictions 
have been in place for years and did not prevent Taiwan's 
stock prices from rising 42% in 2003-2004. 
 
14.  Foreign portfolio investors' stock purchases have 
amounted to NT$293 billion so far in 2005, more than their 
stock sales of NT$38.7 billion, and more than stock 
purchases for all 2004.  Peter Kurtz told AIT that foreign 
investors remain significantly underweight in the TSE 
despite the substantial net inflows this year. 
 
KEEGAN