Cablegate: Taiwan's Semiannual Bop Surplus Soaring

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










E.O. 12958: N/A
SUBJECT: Taiwan's Semiannual BOP Surplus Soaring


1. Taiwan's balance of payments (BOP) surplus in the first
half of 2004 doubled from a year ago to US$24 billion,
increasing Taiwan's foreign exchange (FOREX) reserves to
US$234.6 billion. While this sharp increase is unusual, it
is not likely to continue, and does not presage financial
problems. The sharp increase is mainly due to massive bank
borrowing to meet local corporate demand for foreign
currency loans. The loans are being used primarily to
purchase production inputs for exports, and local banks own
huge foreign assets roughly equal to the amounts borrowed.
Taiwan's current account (C/A) surplus almost matched
capital outflows of direct and portfolio investment. This
contributed to a weaker NT dollar (NTD) in the second
quarter. The second half will likely bring slower export
expansion and reduce Taiwan's C/A surplus. END SUMMARY.

BOP Surplus Soaring

2. In the first half of 2004, Taiwan's BOP surplus totaled
US$24.15 billion, more than doubled the surplus for the same
period of 2003. Depreciation of the Euro and the Japanese
yen relative to the US$ reduced the US$ value of Euro- and
Yen-denominated assets by US$0.67 billion. Consequently,
Taiwan's FOREX reserves after valuation change increased by
US$23.5 billion, from US$211.1 billion in December 2003 to
US$234.6 billion in June 2004.

Banking Sector's Huge Borrowing from Abroad

3. According to Chen Yu-shiu, a section chief at the
Central Bank of China's Economic Research Department, banks
borrowing from abroad to fund foreign currency loans to
local business firms was a major factor behind the sharp
increase in Taiwan's BOP surplus. Foreign currency loans
reached some US$25 billion in the first half of 2004, about
2.3 times higher than the nearly US$11 billion in the same
period of 2003. These foreign currency loans were needed to
purchase production inputs used to fill surging export
orders. In the first six months of this year, Taiwan's
imports have shot up by 35%. The borrowing contributed to
the banking sector's increased foreign liability from
US$26.8 billion in December 2003 to US$46.2 billion in June
2004, while the value of banks' foreign assets remained at
US$43.5 billion.

Capital Outflow Weakens NT Dollar

4. In response to Taiwan's opening of the stock and bond
markets to foreign investors in October 2003, large sums of
foreign capital flowed into the island in the third quarter
of 2003. However, political events after Taiwan's March
2004 presidential election, and fluctuations in New York
Stock Exchange share prices caused mutual fund managers to
pull out money from Asian markets, including Taiwan.
Foreign portfolio investors took US$1.2 billion out of
Taiwan in the second quarter of 2004, reversing an inflow of
US$7.3 billion in the first quarter, and reducing foreign
portfolio investors' cumulative net capital inflow in the
first half of 2004 to US$6.2 billion, down from US$7.4
billion a year ago.

5. The capital outflow weakened the NTD and share prices on
Taiwan's stock market. The stock market index plunged 25%
from 7,034 points in early March to 5,316 points in early
August. The NTD depreciated 4.3% from NT$32.798 per USD in
April 2004 to NT$34.199 per USD in late July 2004.

C/A Surplus Offset by Capital Outflow

6. Taiwan's current account (C/A) surplus of US$11 billion
in the first half of 2004 was almost matched by the net
capital outflow of US$10 billion in direct and portfolio
investment. Outbound direct investment in the first half of
2004 surged 60% from a year ago to US$3.5 billion, 4.6 times
inbound direct investment of US$0.7 billion. Outbound
portfolio investment declined 33% to US$13.5 billion, but
was still more than twice the inbound portfolio investment.

Sharp Increase in Service Trade Deficit

7. Taiwan's service trade recorded a US$2.1 billion deficit
in the first half of 2004, 74% above a year ago. The
increased deficit is partly mainly due to more Taiwan
residents traveling abroad after the fear of SARS (the
contagious disease) subsided in late 2003. Passengers
departing Taiwan in the first half of 2004 totaled 3.7
million persons, up 66% from a year earlier and 2.7 times
the number of inbound passengers. The "travel account"
deficit in the first half of 2004 soared 83% from a year ago
to US$2.5 billion.

Export Expansion Prompts Imports to Grow Faster
--------------------------------------------- --

8. Taiwan's C/A surplus in the first half of 2004 declined
23% from a year ago to US$11 billion due to: 1) imports of
production inputs, and 2) a sharp increase in overseas
travel. Imports on fob basis totaled US$74.5 billion, an
increase of 35% while exports were US$83.5 billion, 25.8%
greater than a year ago. The overall BOP trade surplus fell
by 19% from a year ago to US$9 billion. The export growth
increased demand for industrial materials and semi-finished

Income from FOREX Reserves Declines

9. Interest from CBC FOREX reserves has historically kept
Taiwan's "factor income" account in surplus. Taiwan's FOREX
reserves are mainly deposited in U.S. and Japan banks, and
foreign government bonds. However, a steady decline in
interest rates in the United States prior to early July 2004
drove the CBC's interest earnings down by 8% to US$5.2
billion. According to George Chou, Director General of the
CBC's Foreign Exchange Department, the rate of return for
Taiwan's FOREX reserves in the first half of 2004 averaged
3.5 - 4.5%, less than the average 5-6% in the past, but
higher than bank interest.


10. Tsai Hung-kun, Deputy Director of the DGBAS'
Statistical Bureau, predicts Taiwan's C/A surplus will
likely continue in the second half of 2004 but will decline
due to slower export expansion. He expects export growth
to slow to barely above 10% in the fourth quarter of this
year and to 7% in 2005. He also foresees improved cross-
strait relations resulting from the recently cancelled
military maneuvers, and expects foreign portfolio investors
to bring capital back to Taiwan. Unless fluctuations in
foreign stock markets prompt a large redemption, this would
extend the BOP surplus through the second half of 2004, and
subject the NTD to heavy appreciation pressure.
Appended Table 1
Taiwan's Balance of Payments for 1st Half of 2003 & 2004
(unit: million US$)

- 1st Half 1st Half
Item 2004 2003
------------------------------------- -------- --------
A. Current Account (C/A)
B. Merchandise Trade
- Exports (fob basis) 83,529 66,413
- Imports (fob basis) -74,496 -55,297
- Surplus 9,033 11,116
C. Service Trade
- Credit 13,680 10,622
- Debit -15,771 -11,825
- Deficit -2,091 -1,203
D. Factor Income
- Credit 7,322 6,943
- Debit -1,564 -1,258
- Surplus 5,758 5,685
E. Unrequited Transfer
- Credit 1,606 1,257
- Debit -3,311 -2,496
- Deficit -1,705 -1,239

F. Current Account Surplus (B through E) 10,995 14,359

G. Capital Account (deficit) -48 -39

H. Financial Account

I. Direct Investment
- Outbound -3,469 -2,172
- Inbound 747 559
- Deficit -2,722 -1,613
J. Portfolio Investment
- Outbound -13,477 -20,031
- Equity Shares -8,841 -12,117
- Bonds -4,636 -7,914
- Inbound 6,162 7,382
- Equity Shares 4,406 6,168
- Bonds 1,756 1,214
- Deficit -7,315 -12,649
K. Other Investment
- Assets 3,633 6,003
- Liabilities 21,268 4,865
- Surplus 24,901 10,868

L. Financial Account Balance
(I through K) 14,864 -3,394

M. Net Errors & Omissions -1,664 796

N. Overall Balance (F+G+L+M) 24,147 11,722

O. Change in CBC's Net Assets
- Prior to Adjustment of
- Valuation Change -24,147 -11,722
P. Valuation Change 670 -3,327
Q. Change in CBC's Net Assets
- after Adjustment of Valuation Change -23,477 -15,049
- in Foreign Assets 654 -3,308
- in Gold 16 -19
--------------------------------------------- -----------
Source: Central Bank of China

Appended Table 2
Gold & Foreign Exchange Held by Taiwan
As of June 2003 and June 2004
(Million US$)

- June June
Item 2004 2003
------------------------------------- -------- --------
Central Bank of China:
Gold 4,524 4,409
Foreign Exchange Reserves 230,092 176,686
- -------- --------
International Reserves 234,616 181,095

Deposit Money Banks:
Foreign Assets 43,485 43,176
Foreign Liabilities 46,161 26,800
- -------- --------
Net Foreign Assets 231,940 197,471
--------------------------------------------- ------------
Source: Central Bank of China

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