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Cablegate: Taiwan Economic Briefing for September 2004

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

UNCLAS SECTION 01 OF 02 TAIPEI 003143

SIPDIS

STATE PLEASE PASS AIT/W AND USTR

STATE FOR EAP/RSP/TC, EAP/EP AND EB/IFD/OIA

USTR FOR SCOTT KI

USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER
USDOC FOR 3132/USFCS/OIO/EAP/ADAVENPORT
TREASURY FOR OASIA/ZELIKOW AND WISNER
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 TW
SUBJECT: Taiwan Economic Briefing for September 2004

1. This cable summarizes selected recent economic events in
Taiwan in September 2004. Below is a brief table of
contents:

Para 2 -- Taiwan's economic expansion began to slow in the
third quarter of 2004, but strong exports of iron, steel and
petrochemicals will sustain healthy GDP growth and low
unemployment.

Para 3 -- Taiwan's balance of payments posted a huge surplus
in the first half of 2004, mainly due to bank borrowing for
purchase of production inputs.

Para 4 -- Taiwan's Hsinchu Science Park agreed to cooperate
and pursue commercial opportunities with New Mexico three
science parks.

Para 5 - Taiwan's draft regulations on packaging concern
U.S. suppliers.

Paras 6 & 7 -- Despite a decline in the first half of 2004,
bank capital adequacy ratios remain above the Bank of
International Settlement requirements.

Slowdown in Economic Expansion
------------------------------

2. The rate of Taiwan's economic expansion started to slow
in the third quarter, with slower export and industrial
production growth during July-August. Inflationary pressure
is building as higher oil prices drive up import costs and a
series of tropical storms drove up food prices. In early
October Taiwan's Central Bank of China (CBC) raised interest
rates for the first time in four years as an anti-inflation
measure. Further interest rate increases could dampen the
real estate sector and the entire economy. Nevertheless,
strong foreign demand for Taiwan's iron, steel, and
petrochemicals, and expectations for semiconductor and
liquid crystal display manufacturing to bottom out later in
2004 give business circles optimism, prompting forecasts of
real GDP growth above 4.5 percent and unemployment well
below five percent for 2005. These trends should be
positive factors for the ruling party in the legislative
elections later this year.

Taiwan's Balance of Payments Posts Huge Surplus
--------------------------------------------- --

3. 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
foreign assets roughly equal to the amounts borrowed.
Taiwan's current account (C/A) surplus almost matched
capital outflows of direct and portfolio investment. The
second half of 2004 will likely bring slower export
expansion and reduce Taiwan's C/A surplus.

Cooperation between U.S.-Taiwan Science Parks
---------------------------------------------

4. On August 26, the Deputy Director General of Taiwan's
Hsinchu Science Park and representatives of three science
parks in New Mexico signed a memorandum of cooperation aimed
at encouraging the development of the smaller New Mexico
parks and creating opportunities for commercial cooperation
between tenants of the Hsinchu park and tenants of the New
Mexico parks. Senator Bingaman of New Mexico, who visited
the Hsinchu park in December 2003, facilitated the
agreement. The U.S. parks hope to learn from the experience
and success of the Hsinchu park, which was established in
1980 and is now home to 370 high tech firms whose exports
accounts for 30-35 percent of Taiwan's total exports.

New Regulation Against "Excessive" Packaging
--------------------------------------------

5. In July, Taiwan's Environmental Protection
Administration (TEPA) introduced a draft regulation against
"excessive" packaging. While TEPA claims local industry
supports the proposed legislation, foreign industry
representatives are strongly opposed. AIT has persuaded
TEPA to submit the legislation to WTO for comment, and to
extend the time-line for finalizing the legislation. AIT
ESTOFF has discussed this issue with AmCham, COSTCO and ECCT
leadership. Based on those discussions, AmCham and ECCT
will host a meeting with some of the more proactive industry
reps.

Taiwan Bank Health
------------------

6. Taiwan banks reported a slight decline in capital
adequacy ratio from 10.07 percent to 10.01 percent in the
first half of 2004, still above the eight percent minimum
set by the Bank for International Settlements. Central bank
officials attributed decline in the capital adequacy to
Taiwan banks' massive write-offs of bad debt over the past
five years and to a significant increase in bank loans as
the economy rapidly expanded over the past year. Meanwhile,
the bad debt write-off drove down Taiwan banks' average non-
performing loan (NPL) ratio, using internationally accepted
measures, from a double-digit level in early 2002 to below
five percent in June 2004.

7. Despite the improvement, Taiwan's Financial Supervisory
Commission (FSC) continued to strengthen supervision of the
banking sector. The FSC has drafted revisions to the
Deposit Insurance Statute that will authorize the Central
Deposit Insurance Corporation to take over any financial
institutions with a capital adequacy ratio of under two
percent. The bill requires troubled financial institutions
to pay extra insurance charges on top of normal premiums to
further encourage banks to maintain a prudent lending policy
and protect against insolvency.

PAAL

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