Cablegate: Economic Briefing for October 2005

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

012256Z Nov 05

UNCLAS SECTION 01 OF 03 TAIPEI 004418

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 October 2005
REF:

1. This cable summarizes selected recent economic events in
Taiwan in October 2005:

--Economic performance in Q3
--Office Space
--Capital outflow weakens NT Dollar
--Renminbi exchange liberalization
--PRC Tourists in Taiwan
--Semiconductor facility utilization
--Taiwan students consider China
--Hong Kong-Taichung charter flights
--ECCT Criticism
--Hurricane Katrina reconstruction

Taiwan Economic Performance Improves
------------------------------------

2. Although production and trade growth remained at single-
digit levels, Taiwan has seen solid signs of improvement in
economic performance in Q3 this year. A decline in
inventories in advanced-country markets and weaker NT dollar
has contributed to a steady rise in Taiwan's export growth
from 3.1% in June to 8.5% in September. Local economists
expect the growth in exports will continue as the U.S.
Government implements a US$200 billion hurricane damage
reconstruction program (see Para 12). Taiwan's
manufacturing sector has gone from negative growth of 1% in
Q1 to a 12-month high of 6.4% in September 2005. Foreign
investment in Q3 shot up 53.6% from a year ago, a sharp
contrast to the negative figures in Q1 and Q2. Higher oil
prices, coupled with storm damage to vegetable and fruit
farms this summer, pushed up the inflation rate to a nine-
year high of 3.6% in August (it declined to 3.1% in
September.) In late October, the Chunghua Institution for
Economic Research forecast Taiwan's 2005 quarterly growth
would rise from 2.5% in Q1 and 3% in Q2 to 4.1% in Q3 and
4.4% in Q4. It predicts that 2005 real GDP will grow at
3.5%.

Grade A Real Estate
-------------------

3. The Taipei 101 Tower (the world's tallest building) and
the Uni-President HQ Building both became available for
occupancy in the second quarter of 2005 causing the vacancy
rate of Taipei Grade A office space to jump from a little
over 5% to almost 19%. Rents, which had risen in the three
previous quarters, fell slightly in the third quarter.

Capital Outflow Weakens NTD
---------------------------

4. Taiwan's foreign exchange market has experienced huge
fluctuations over the past year. Capital inflows from July
2004 to March 2005 caused the NT Dollar (NTD) to gain 10%
against the US dollar (USD). However, from July through
October this year large capital outflows have weakened the
NTD by 9.35%. The inflows late last year and early this
year were partially due to Morgan Stanley Capital
International increasing Taiwan's weight in its stock price
index and partially due to expectations for greater renminbi
(RMB) appreciation (because most Taiwan investment is
located in China.) The NTD went from NT$34.2 per USD in
July 2004 to a five-year high of NT$30.8 per USD in March
2005.
5. The PRC permitted the RMB to appreciate only 2% in July
this year, far less than the 10% predicted by many in the
business community. Speculative capital flowed out of
Taiwan after the failure to gain from a more significant RMB
appreciation. Some foreign portfolio investors also
withdrew investment funds in reaction to Taiwan's political
stalemate and corruption scandals. Taiwan's stock price
index declined 10% from July to October, and the NTD
depreciated to 33.7 per USD at the end of October 27.

RMB Exchange - Further Liberalization?
--------------------------------------

6. Taiwan's RMB-NTD direct currency exchange pilot program
on the offshore islands of Kinmen and Matsu saw RMB 1.7
million exchanged from October 3 to 20. People First Party
Legislator Christina Liu has introduced a bill that would
remove the requirement for a bilateral exchange settlement
agreement and require only an exchange settlement mechanism
as a prerequisite for allowing direct RMB-NTD currency
exchange throughout Taiwan. The bill is currently under
review in the Legislative Yuan.

PRC Tourism Up for "Golden Week"
--------------------------------

7. The Travel Agent Association of Taiwan (TAAT) told AIT
that during September 28 - October 2 National Day holiday in
China ("Golden Week") approximately 3,000 PRC tourists
visited Taiwan. This was more than twice the number of
visits in the entire month of October last year. TAAT
estimated that each tourist spent an average of around USD
5,000 to visit Taiwan and that Taiwan businesses took in an
additional NT$300 million (about US$9 million) as a result.
Taiwan currently permits only PRC nationals who are living
or traveling abroad to visit Taiwan for tourism.

Semiconductor Capacity Utilization
----------------------------------

8. Taiwan Semiconductor Manufacturing Company (TSMC)
announced that its capacity utilization rate increased from
78% in the first quarter to 96% in the third quarter. The
firm predicts that utilization will rise further to over
100% in the fourth quarter. (Semiconductor manufacturing
firms base capacity utilization rates on the standard
specifications for manufacturing equipment. With modified
equipment, capacity utilization rates can exceed 100%.)
United Microelectronics Company (UMC), TSMC's main rival,
reported that its capacity utilization rate increased from
63% in the first quarter to 78% in the third and should hit
85% in the fourth. TSMC and UMC are the world's two largest
contract semiconductor manufacturers.

Taiwan Students Look West
-------------------------

9. According to a survey published by Taiwan's Career Media
magazine, the PRC has surpassed the United Kingdom to become
Taiwan students' second favorite destination for graduate
studies after the United States. The survey indicated that
the main reason Taiwan students are interested in studying
in China is because they believe a degree from a PRC
institution will help them get a job there. The magazine
reports that there are approximately 10,000 Taiwan students
in China's graduate and undergraduate programs. According
to the survey, 60% of Taiwan undergraduates are willing to
work in the PRC.

More Hong Kong-Taichung Charter Flights
---------------------------------------

10. Taichung Mayor Jason Hu visited Hong Kong October 14
urging Hong Kong authorities to resume charter flight
service to Taichung. Hong Kong authorities approved an
application from Taiwan's Mandarin Airlines on October 18 to
conduct two round-trip charter flights on October 20 and 23.
Even with such short notice, Mandarin Airlines was able to
fly October 20 with a passenger load of 80% of capacity.
UNI Airways Corp. was later approved for a Taichung-Hong
Kong flight on October 27 and a Hong Kong-Taichung flight on
October 29.

ECCT Has Harsh Criticism for Taiwan
-----------------------------------

11. The European Chamber of Commerce in Taipei (ECCT)
released its 2005-2006 Position Papers at a press conference
on October 26. The Position Paper warns that Taiwan is
losing business competitiveness relative to other East Asian
economies and cites four key areas where change is needed:
1) over-regulation, 2) slow cross-Strait commercial
normalization, 3) WTO non-compliance, 4) slow services
upgrade. Taiwan's Council for Economic Planning and
Development has promised to hold meetings to discuss the
ECCT proposals.

Hurricane Katrina Reconstruction Benefits Taiwan
--------------------------------------------- ---

12. The U.S. is implementing a US$200 billion
reconstruction program for three southern states that
sustained heavy damage from Hurricane Katrina. The program
has started to benefit Taiwan's export sector, particularly
for furniture, fixtures, pipes & tubes, power tools, hand
tools, and auto parts. For a number of Taiwan companies,
export orders received in September and October shot up by
90% from a year ago. September 2005 sales of Chen Lin, a
major faucet supplier, nearly doubled to NT$400 million
(US$11.9 million). Taiwan suppliers expect that export
orders from and sales in the three southern states will
continue to increase through early next year.

PAAL

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