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Cablegate: Taiwan's Q2 Balance of Payments

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

282343Z Aug 05

UNCLAS SECTION 01 OF 02 TAIPEI 003574

SIPDIS

STATE PLEASE PASS AIT/W AND USTR

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

USTR FOR AUDREY WINTER AND TIM WINELAND

USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER
USDOC FOR 3132/USFCS/OIO/EAP/ADAVENPORT
TREASURY FOR OASIA/MOGHTADER
TREASURY PLEASE PASS TO OCC/AMCMAHON
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF
GOVERNORS/DAVID SNYDER, AND SAN FRANCISCO FRB/TERESA CURRAN

E.O. 12958: N/A
TAGS: EINV EFIN ECON PINR TW
SUBJECT: Taiwan's Q2 Balance of Payments


SUMMARY
-------

1. Taiwan's balance of payments (BOP) in Q2 of 2005 posted
a surplus of US$6.45 billion, pushing foreign exchange (FX)
reserves to US$253.62 billion. The BOP would have run a
deficit if Taiwan's Central Bank of China (CBC) had not
increased its short-term liabilities through repurchase
agreements with its stock of U.S. bonds. The island's
current account (C/A) barely recorded a surplus in Q2 of
2005, a five-year low. END SUMMARY.

Overall BOP Surplus
-------------------

2. Taiwan's BOP in Q2 of 2005 posted its 15th surplus of
the past 16 quarters. The BOP balance in Q2 of 2005 would
have posted a deficit of US$0.34 billion if the CBC had not
borrowed US$6.79 billion through repurchase agreements using
its stock of U.S. bonds. The CBC's action reversed what
would have been a deficit in Taiwan's financial account
(F/A). Market sources indicated that CBC took the action to
increase earnings from its FX asset management.

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C/A Surplus Sets Five-year Low
------------------------------

3. Taiwan barely maintained its C/A surplus in Q2 of 2005,
which dropped 70% from a year ago to a five-year low of
US$1.7 billion. Poor export performance drove the C/A
surplus down. Export growth in Q2 of 2005 declined to only
6.2% from nearly 30% a year ago. Import growth, on the
other hand, grew 11%, mainly because of higher petroleum
prices.

Expectations for Stronger RMB Led to Capital Outflow in
Financial Account
--------------------------------------------- ----------

4. Another cause for the 70% drop in C/A surplus was
expectations for appreciation of the renminbi (RMB) against
the US dollar (USD) prior to the RMB revaluation on July 22.
Industry contacts told AIT/T that many Taiwan business firms
tried to take advantage of the expected RMB appreciation and
so kept their overseas earnings offshore. This cut earnings
from triangle trade (orders received in Taiwan, but produced
in China, and shipped to third countries) in Q2 by 36.4%
from a year ago to US$2.7 billion.

5. Expectations for RMB appreciation also led to US$5.2
billion of capital outflow in bank loans in Q2 of 2005, a
sharp contrast to an inflow of US$3 billion in Q2 of 2004,
as well as an inflow of US$10 billion in Q1 of 2005. Local
banks increased lending and repayment to correspondent banks
overseas as well. In addition, some offshore customers
withdrew their deposits from local banks. This capital
outflow offset 60% of foreign institutional investors'
(FIIs) inward remittances of US$9 billion (prompted by the
Morgan Stanley Capital International's increasing the weight
of Taiwan stocks in its international index from 0.75 to
1.00 in May 2005). The remaining 40% of FIIs' inward
remittances were totally offset by net outward direct
investment and Taiwan institutional investors' offshore
portfolio investment.

CBC's Short-term Debt Offset Speculative Capital Outflow
--------------------------------------------- -----------

6. From its repurchase agreements with its stock of U.S.
bonds in Q2 of 2005, the CBC obtained US$6.7 billion in
short-term liabilities from foreign banking institutions.
The CBC bought products with higher yields. According to
the CBC, such repurchase agreements involve little risk and
are a common practice of central banks in East Asia.

Large FX Reserves
-----------------

7. The CBC's US$6.7 billion of short-term liability
contributed to an increase of US$2.48 billion during Q2 of
Taiwan's FX reserves to US$253.62 billion, an amount
sufficient to meet import requirements for 16 months.

8. Taiwan's BOP remained basically healthy although the
CBC's repurchase agreements contributed to an increase in
Taiwan's external debt. According to CBC statistics,
Taiwan's outstanding external debt as of March 2005 rose 10%
from a year ago to US$82.5 billion, and outstanding external
debt as a percentage of GDP rose from 24.5% to 24.9%.
Public external debt outstanding at the end of March 2005
was US$2.4 billion, a sharp rise from only US$0.22 billion a
year ago. The public external debt included US$1.59 billion
in CBC liability arising from its repurchase agreements with
a stock of U.S. bonds and US$0.8 billion in government bonds
held by foreign institutional investors.

PAAL

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