Cablegate: New Taiwan Foreign Currency Bond Market

VZCZCXYZ0000
RR RUEHWEB

DE RUEHIN #3550/01 2900859
ZNR UUUUU ZZH
R 170859Z OCT 06
FM AIT TAIPEI
TO SECSTATE WASHDC 2621

UNCLAS AIT TAIPEI 003550

SIPDIS

INFO USDOC WASHDC
AMEMBASSY BANGKOK
AMEMBASSY BEIJING
AMEMBASSY SEOUL
AMEMBASSY SINGAPORE
AMEMBASSY TOKYO
AMEMBASSY MANILA
AMEMBASSY JAKARTA
AMEMBASSY KUALA LUMPUR
AMEMBASSY HANOI
AMEMBASSY CANBERRA
AMEMBASSY WELLINGTON
AMCONSUL HONG KONG
AMCONSUL SHANGHAI
AMCONSUL GUANGZHOU
DEPT OF TREASURY WASHDC

SIPDIS, SENSITIVE BUT UNCLASSIFIED

STATE PLEASE PASS AIT/W AND USTR

STATE FOR EAP/TC, EAP/EP

USTR FOR ALTBACH

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: New Taiwan Foreign Currency Bond Market

REF: Taipei 2695

SUMMARY
-------

1. (SBU) Taiwan has established a foreign currency bond market and
expects the first bond listings in October. The move is another in
a series of measures designed to better utilize Taiwan's surplus
capital. However, restrictions such as limits on PRC investment and
the lack of incentives will limit the bond market's appeal and
utility. End summary.

Bonds Denominated in Foreign Currency
-------------------------------------

2. (U) In late August, the Taiwan Securities and Futures Bureau
(SFB) announced rules for a new foreign currency bond market that
will allow any company listed on the 19 foreign stock markets
recognized by the FSB, foreign governments, and international
organizations to list bonds denominated in U.S. dollars, Euros,
Japanese yen and other currencies. Local and foreign investors,
except those from China, may trade bonds listed on the new market.
This will help soak up and utilize Taiwan's huge capital surplus
(reftel).

3. (SBU) Taiwan's Over-the-Counter (OTC) Center, which will operate
the new market, says Deutsche Bank plans to issue US$300-500 million
of bonds in October and several other foreign companies have
expressed interest. Over 20 underwriters have applied to the
Foreign Exchange Department under Taiwan's Central Bank of China for
foreign currency bond underwriting licenses. The OTC Center
estimates the total value of bonds listed will reach NT$100 billion
(US$3.1 billion) by the end of 2009.

Securities Transaction Taxes Waived
-----------------------------------

4. (U) The securities transaction tax will be waived for
transactions in this new market, as it is in the NT$ bond market.
Individuals will be exempt from income tax on interest earned on
foreign currency bonds issued by offshore companies because Taiwan's
tax law exempts individual income earned from overseas sources.
However, corporate entities must pay income tax on overseas income.
Both individuals and corporate entities are subject to income tax on
interest earned from bonds issued by domestic companies.

5. (SBU) Taiwan prohibits firms listed on the Taiwan Stock Exchange
from investing more than 40% of their net worth in China. This same
restriction will also apply to companies listing on the foreign
currency bond market. Taiwan has also relatively strict listing
requirements, such as a minimum credit rating, that foreign bond
markets do not have. These restrictions will dampen the enthusiasm
of multinational corporations for issuing and listing bonds in
Taiwan, even though listing and underwriting costs in Taiwan are
less than in other bond markets.

Bond Markets Very Competitive
-----------------------------

6. (SBU) The Chief Financial Officer of a major U.S. company told
AIT bond markets in East Asia are very competitive. She said it was
not uncommon for regulators to require use of some local financing
in major investment projects. Without any requirement to use local
financing, she said, her company would continue to rely on cheaper
capital from Japan's bond markets for its projects in Taiwan.

7. (SBU) Although the appeal to companies may be limited, Taiwan's
new bond market may be attractive to local individuals because the
trading unit is only US$10,000 and individuals are exempt from
Taiwan income tax on interest earnings.

Comment
-------

8. (SBU) Taiwan authorities need to find a way to utilize Taiwan's
surplus capital, but are stymied by political factions opposed to
facilitating investment in China. While the recent establishment of
a foreign currency bond market is a small step forward in
internationalizing Taiwan's financial markets, the current
regulations limit its appeal.

Young

.

© Scoop Media