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Cablegate: Taiwan Growth Slowing

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 003992

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 Growth Slowing


SUMMARY
-------

1. Taiwan's economic growth is expected to drop from 7.3
percent in the first half of 2004 to 4.7 percent in the
second half following declines in export growth, industrial
production, and private investment. END SUMMARY.

Economic Slowdown
-----------------

2. In late November 2004, the Directorate General of
Budget, Accounting and Statistics (DGBAS) adjusted Taiwan's
estimated 2004 economic growth upward for the fifth time to
nearly six percent. At the same time, DGBAS predicted
Taiwan's economic growth would slow from 7.3 percent in the
first half of 2004 to 4.7 percent in the second half and
further down to 4.5 percent in the second half of 2005.

3. Tsai Hung-kun, Deputy Director of the DGBAS' Statistics
Bureau, attributed Taiwan's economic slowdown mainly to
three factors: rising interest rates and oil prices and the
"negative wealth effect" of falling stock prices. The U.S.
Federal Reserve Board's raising interest by one percentage
point during June - October dampened lowered demand for
Taiwan's exports. Higher oil prices pushed up prices and
dampened Taiwan consumer spending in Taiwan. A decline in
Taiwan stock prices in the third quarter of 2004 reduced the
wealth of local consumers, and further weakeninged their
confidence and demand.

Export and Import Growth Down
-----------------------------

4. According to DGBAS, export growth in 2004 declined from
29 percent in the second quarter to 21 percent in the third
quarter and will fall to an estimated 12 percent in the
fourth quarter. Deputy Director Tsai projected that export
growth would drop to seven percent in 2005. He predicted
import growth would slow from 40 percent in the second
quarter to 19 percent in the fourth quarter of 2004 and down
to six percent in 2005.

Orders Filled by Offshore Production Bases
------------------------------------------

5. However, the growth of export orders has not declined
along with the decline in growth of exports. This reflects
the fact that Taiwan offshore production factories fill an
increasing percentage of export orders received by Taiwan
companies. According to a Ministry of Economic Affairs
(MOEA) survey, export orders have grownth at a year-on-year
rate of 26 percent for the first ten months of 2004. A
survey by the Ministry of Economic Affairs showed that
Taiwan business firms filled nearly 40 percent of the export
orders by shipments from overseas production factories and
that 60-70 percent of those shipments came from China.

Strong Competition from South Korea
-----------------------------------
6. According to MOEA officials, strong competition from
South Korea is eroding Taiwan business firms' market in
China, particularly in the high-tech area. Demand from
Taiwan-invested down-stream flat panel display firms in
China contributed to triple-digit growth in Taiwan's exports
of flat panels and related products to China in the first
half of 2004. However, according to MOEA, South Korean
competitors have successfully snatched a large share of this
market in China by undercutting Taiwan prices on these
products. As a result, Taiwan's exports of flat panel
products posted a decline from 140 percent growth in the
first seven months to 86 percent in August and 20 percent in
September 2004. South Korea replaced Taiwan as the second
largest source of China's imports in September 2004.

Investment and Money Supply Growth Decline
------------------------------------------

7. Slower export growth in the second quarter was reflected
in rising inventories in the fourth quarter and a drop in
private investment growth from 33 percent to 20 percent.
DGBAS predicts private investment growth in 2005 would slip
to nine percent. Industrial growth dropped from 14 percent
in the first quarter and 15 percent in the third quarter to
three percent in October 2004. Another indication of
economic slowdown is declining money supply growth. M1B
growth in October 2004 at 14.7 percent was the lowest in 14
months. Growth in M2 plus bond funds also hit a 12-month
low of 6.3 percent. (M1B is a measure of money that refers
primarily to money that can be used in transactions. M2 is
a broader measure of money that includes M1B plus deposited
money that cannot be readily used in transactions.)

Lowest Unemployment in Three Years
----------------------------------

8. Despite the economic slowdown, Taiwan's unemployment
rate in October 2004 declined to 4.3 percent, the lowest
rate in three years and down from 5.3 percent in August 2002
and the lowest rate in three years.

Manufacturing Firms: Pessimistic
-------------------------------

9. An October 2004 survey showed that only 13 percent of
Taiwan businesses expect business performance to improve
over the coming three months, down from over 33 percent in
January and February 2004.

KEEGAN

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