Cablegate: Economic Briefing for August 2005

This record is a partial extract of the original cable. The full text of the original cable is not available.

060240Z Sep 05

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
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

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