Cablegate: Taiwan's 2004 Balance of Payments

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 2004 Balance of Payments

REF: Taipei 875


1. In 2004 Taiwan's balance of payments (BOP) posted a
surplus of US$26.6 billion, resulting from its trade
surplus, earnings from foreign exchange reserves, and
capital inflows prompted by continued Taiwan Dollar (NTD)
appreciation against the USD. The stronger NTD appears to
be cutting into Taiwan's trade surplus. END SUMMARY.

Surplus Builds Foreign Exchange Reserves

2. Taiwan recorded a BOP surplus of US$26.6 billion in
2004, the seventh consecutive annual surplus. The BOP
surplus and revaluation of reserve currencies against the
USD drove Taiwan's foreign exchange reserves up 17% to
US$241.7 billion, the third highest after Japan's US$844.5
billion and China's US$609.9 billion. Taiwan's Central Bank
(CBC) says about one-quarter of Taiwan's foreign exchange
reserves are denominated in non-U.S. currencies.
Appreciation of these currencies in 2004 was 8.1% for the
EURO, 4.3% for the Japanese Yen, and 1.1% for the Pound

Foreign Exchange Reserve Composition Unchanged
--------------------------------------------- -

4. On February 23, Taiwan's Commercial Times newspaper
reported that the Central Banks of Taiwan and South Korea
had dumped USD assets, contributing to rapid depreciation of
the USD. Taiwan's CBC quickly denied the report. George
Chou, Director General of the CBC's Foreign Exchange
Department, told AIT/T that the composition of Taiwan's
foreign exchange reserves had remained basically unchanged
over the past two years (reftel).

Components of 2004 BOP Surplus

5. Taiwan's BOP surplus for 2004 totaled US$26.6 billion of
which 71.5% came from the current account (C/A) surplus and
23.9% from the financial account (F/A) surplus. Net errors
and omissions made up the rest. Taiwan has had a C/A
surplus every year over the past five decades except for the
oil-shock years of 1974, 1975 and 1980. Taiwan's C/A
surplus of US$19.0 billion in 2004 resulted from a trade
surplus of US$16.5 billion and net factor income (income
residents receive from abroad less similar payments made to
non-residents) of US$11.5 billion. These surpluses offset a
service trade deficit of US$5 billion and a current transfer
deficit of US$3.9 billion. In 2004, merchandise exports and
merchandise imports equaled 57% and 55% of GDP,
respectively. Taiwan's Capital Account deficit of US$77
million in 2004 has declined steadily from US$287 million in
2000, reflecting a drop in net capital transferred out of
Taiwan by residents emigrating overseas.

Major Sources of Imports: USA and Japan

6. Only nine percent of Taiwan's total imports are consumer
goods, while over 90% are production inputs such as raw
materials, intermediary goods, and machinery and equipment.
The United States and Japan are the two major sources of
Taiwan's imports and provide most of the required
manufacturing technologies. In 2004, 13% of Taiwan's total
imports came from the United States and 26% from Japan.

Exports from China
7. Although China surpassed the United States as Taiwan's
largest export market in 2001, the United States is still a
major export destination. Taiwan's exports to China are
mainly inputs to be processed for re-export to the United
States. Business firms take orders in Taiwan and ship
products to foreign buyers from China. Export orders coming
from the United States account for the largest share (nearly
30%) of total foreign orders received by Taiwan in 2004,
higher than the 16% of Taiwan's exports shipped directly to
the United States. In 2004, the United States and Greater
China (China plus Hong Kong) accounted for over half of
Taiwan's total exports.

Factor Income

8. Taiwan's 2004 earnings of US$10.9 billion on its foreign
exchange reserves constituted 96% of total Factor Income
(payments residents receive from abroad for land,
entrepreneurship, labor, and capital) surplus last year.
The CBC earned an overall 4.5% rate of return for Taiwan's
foreign exchange reserves in 2004. Inflows to Taiwan from
dividends and profits distributed by overseas branches or
subsidiaries of Taiwan companies in 2004 for the first time
exceeded outflows from foreign firms in Taiwan. Taiwan's
services trade deficit was down from US$9 billion in 1995 to
US$5 billion in 2004.

Capital Supplier to the World

9. Despite Taiwan's Financial Account surplus of US$6.4
billion in 2004, which indicates a large net capital inflow,
Taiwan remained a major capital supplier to other countries.
Outbound portfolio investment in 2004 amounted to US$23.5
billion, 38% more than the US$17 billion of inbound
portfolio investment. Taiwan's direct investment overseas
in 2004 totaled US$7.1 billion; nearly quadruple the US$1.9
billion in foreign direct investment in Taiwan. Outward
direct investment has exceeded inward direct investment
every year since 1987 when Taiwan first permitted investment
in China. Taiwan's cumulative overseas investment approved
by the Ministry of Economic Affairs through December 2004
totaled US$83.3 billion, half of which went to China. A
significant part of the non-China investment went to China
via Hong Kong, the United States, and tax havens such as
Bermuda, The Cayman Islands and The British Virgin Islands.
The CBC estimates Taiwan's investment in China exceeds US$70

Capital Inflow by Speculators

10. The 2004 Financial Account surplus of US$6.4 billion
resulted mainly from capital inflows by speculators
expecting continued appreciation of the NTD. CBC Economic
Research Department senior specialist Chen Yu-shiu told
AIT/T that in the second half of 2004, the NT dollar (NTD)
appreciated 6.7% against the USD, much higher than would be
expected just from the interest rate gap between USD and NTD
deposits. Foreigners deposited US$10 billion with Taiwan
banks last year. Some foreign portfolio investors parked
investment funds in bank accounts in expectations of foreign
exchange gains, according to Chen.


11. Taiwan's C/A surplus has strengthened the NTD, and the
stronger NTD has led to changes in the pattern of Taiwan's
foreign trade. The NTD's 10% appreciation against the USD
since mid-2004 has helped reduce Taiwan's trade surplus from
US$4.7 billion in Q3 of 2003 to US$2.4 billion in Q3 of
2004, down to a trade deficit of US$0.2 billion appeared in
Q4 of 2004. Taiwan's trade surplus in the first two months
of 2005 dropped 51% from the same period a year ago. Local
economists think that in the longer term, Taiwan will
continue to post a trade surplus and C/A surplus, although
smaller than in 2003 and 2004 and that the strong NTD will
continue to attract foreign capital, unless cross-Strait
relations deteriorate significantly.


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