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Cablegate: Taiwan Economic Review for October 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 003663

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 Review for October 2004

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

- China's Interest Rate Hike

- Central Government Budget

- China Airlines Privatization

- Cross-Strait Economic Normalization

- Problem Financial Institutions

Effect of China's Interest Rate Hike
------------------------------------

2. In late October 2004, the People's Bank of China (PBC),
China's central bank, raised interest rates for the first
time in nine years. Taiwan's exports rely heavily on
production lines based in China, and Taiwan companies will
face some increased operating costs brought on by higher
interest rates. Taiwan economists expect that higher
interest rates will dampen China's real estate sector and
cut into Taiwan's exports of construction materials such as
iron and steel. However, this will have little impact on
Taiwan's China-based manufacturing, since most of its
production is for export to the U.S. and other developed
markets.

Taiwan's Central Government Budget
----------------------------------

3. According to the proposed 2005 Taiwan government budget,
income taxes remain the major source of Taiwan's central
government revenue. However, Taiwan's Executive Yuan
expects proceeds from sales of public enterprise equity
shares to double this year. It hopes to use these proceeds
to reduce the growing budget deficit. Public debt is nearly
NTD 3.67 billion (USD 107.9 billion) or 35.7 percent of
Taiwan's GNP. The extent to which equity sales are able to
cut public debt will depend on how much can actually be sold
in the face of strong opposition from labor groups and some
legislators.

Privatization Plans for CAL Changed
-----------------------------------

4. Taiwan's Ministry of Transportation and Communications
(MOTC) stepped back from plans to fully privatize China
Airlines (CAL), which is currently 69 percent state-owned,
by the end of 2005. In a recent speech, MOTC Minister Lin
Lin-san said the government needed to keep a controlling
stake in the airline, though not more than 50 percent. He
said that like many other nations, Taiwan should have a
"national" airline that can demonstrate Taiwan's sovereignty
to other countries. CAL's recent profit report for 2004 may
have influenced the change in policy. On October 20, CAL
predicted its 2004 profit would be NTD 90 billion (USD 2.7
billion).

Cross-Strait Investment Festival
--------------------------------

5. The Taiwan Ministry of Economic Affairs, Straits
Exchange Foundation, and Mainland Affairs Committee (MAC)
hosted some 300 participants at their 2004 mid-autumn
festival event for Taiwan investors in China on October 3-4
in Taoyuan. President Chen, Vice President Lu, Premier Yu,
and MAC Chairman Joseph Wu all took part in the event. In
his public remarks, Premier Yu said that Taiwan would
continue to promote cross-strait economic and trade
normalization, including expanding China's permitted
commercial activities in Taiwan, liberalizing tourism and
professional exchanges, expanding imports, and initiating
consultations on cross-Strait direct transportation. MAC
Chairman Wu reiterated Taiwan's willingness to discuss
charter flight service with China for Taiwan investors'
returning to Taiwan for the 2005 Chinese New Year holidays.

6. Separately, the twelfth annual Taiwan, PRC, and Hong
Kong insurance cooperation conference took place in Taipei
from October 25 to 26. In recent years, Taiwan's Cathay
Life, Taiwan Life, and Min Tai (Non-life) have all set up
offices in the PRC. This year the level of the PRC's
government representation at the conference was raised to a
division head insurance supervisory official.

Problem Financial Institutions
------------------------------

7. After more than two years of financial reform, Taiwan's
smaller financial institutions still have serious, although
sometimes hidden, problems. The Agricultural Financial
Bureau reported to the Legislative Yuan in mid-October 2004
that only three Farmers' Associations credit departments had
negative net worth. However, a legislator revealed an
internal Agricultural Financial Bureau report that concluded
that 92 out of 279 Farmers' Association credit departments
had negative net worth. The internal report also indicated
that 99 Farmers' Association's credit departments reported
non-performing loan ratios above 15%. The discrepancy was
the result of using two different ways to calculate non-
performing loans. The stricter method, which uses the
internationally accepted definition of non-performing loans
as no payment of interest or principle for at least three
months, indicates more of the credit departments have
negative net worth.

PAAL

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