Cablegate: Taiwan Economic Stimulus & New Bank Branches

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 002365

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 Stimulus & New Bank Branches

Ref: Taipei 2289

SUMMARY
-------

1. Immediately following the release of weak economic data
for the first quarter of 2005 (reftel), Premier Frank Hsieh
announced a program to increase funding for home buyers and
small & medium enterprises by NT$600 billion. Some NT$400
billion of the support comes from government agencies.
However an additional NT$200 billion in bank loans is to
come from the banking system. In a move that may blur the
distinction between regulators and government programs, the
Financial Supervisory Commission will reward banks that
increase loans to SMEs by approving a limited expansion of
their branch network. END SUMMARY.

Economic Stimulus
-----------------

2. The Directorate General of Budget, Accounting and
Statistics recently lowered its projections for Taiwan's
real growth in 2005. In February, it was projecting real
GDP growth for the year would be 4.21%, but now it is
calling for growth of 3.63%. Shortly after this new lower
growth outlook and the additional release of weak economic
data for the first quarter of 2005 (reftel), Premier Frank
Hsieh announced a program to increase funding for home
buyers and businesses by NT$600 billion. Hong Jui-bing,
Director General of the Council for Economic Planning and
Development's Economic Research Department, expected that
these programs could push up the island's real GDP growth by
0.5-0.6 percentage points and increase employment by 240,000
persons.

3. The additional funding is divided into three areas:

-- NT$100 billion in loan guarantees for small & medium
enterprises (SME);

-- NT$200 billion in bank loans for SME; and

-- NT$300 billion for a low-interest housing loan program.
The additional loan guarantees will be provided through the
Credit Guaranty Program administered by the Ministry of
Economic Affairs. The additional funding for the housing
loans will be in the form of an interest rate subsidy of
0.125 percent provided through government grants to housing
loan borrowers. This last measure is likely in response to
2004 data reporting that unsold primary housing units in
northern Taiwan have reached a four-year high of 32,000
units with a value of some NT$251 billion.

No Government Funds for New Bank Loans
--------------------------------------

4. The additional bank loans will not come from the
government. Instead, the proposal depends on the FSC to
administer an incentive scheme to encourage the banking
system to increase loans to SMEs. On May 23, FSC announced
a three-year incentive program based on an opportunity for
banks to "earn" new branches. For the past two-plus years,
financial officials have enforced a policy of not allowing
banks to increase their branches. Faced with a financial
sector widely viewed as "overbanked," Taiwan's policy has
been that banks can only acquire new branches through merger
and acquisition of existing banks. The May 23 incentive
scheme modifies the existing policy, raising the possibility
that banks may feel less pressure to merge.

5. According to the FSC's program, to be implemented in
July 2005, the branching incentive will be available to the
eight banks posting the largest amount of new loans to SMEs.
The top one will be allowed to upgrade offices from the
status of limited-function offices to full operating
branches. The bank with the second-largest increase will be
permitted to upgrade two offices to branches. The bank with
the third best increase will be allowed to upgrade a single
office. For the rest of the five best-performing banks,
each will be authorized to merge two offices into one
branch. These eight banks will be able to move their new
branches to any location outside of the cities and counties
of Taipei and Kaohsiung (where banking offices are
considered overcrowded.)

6. In addition, FSC will allow limited-function offices to
extend loans to SMEs, a kind of corporate lending currently
only authorized to full branches. Limited-function offices
are currently permitted to accept deposits and trust funds,
offer consumer loans, advance cash to credit card holders,
sell traveler's checks, and provide services in domestic
remittance and foreign currency exchange.

COMMENT
-------

7. (SBU) Taiwan's financial regulator is taking on a new
role in promoting government lending policies. This
incentive program runs the risk of blurring the lines
between the regulator and government programs. In addition,
loosening the restrictions on bank branches may weaken the
incentive for banks to actively pursue mergers and
acquisitions. End Comment.
PAAL

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