Cablegate: Taiwan Stock Market Doomed?

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

032309Z Nov 05

UNCLAS SECTION 01 OF 03 TAIPEI 004461

SIPDIS

STATE PLEASE PASS AIT/W AND USTR

STATE FOR EAP/TC, EAP/EP

USTR FOR WINTER AND WINELAND

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

SENSITIVE

E.O. 12958: N/A
TAGS: EINV EFIN ECON PINR TW
SUBJECT: Taiwan Stock Market Doomed?

SUMMARY
-------

1. On October 17, a prominent China Times article by a
local political science professor described the Taiwan Stock
Exchange (TSE) as having no future. The article claimed
that the growing number of de-listings and worsening
performance indicated that TSE would cease to exist as a
functioning market within ten years. However, local
economic analysts discount this bleak assessment and believe
TSE remains attractive, as shown by high foreign portfolio

SIPDIS
investment inflows and the assessment of international
ratings firms. END SUMMARY.

China Time's Weekly Column
--------------------------

2. On October 17 (Monday), the China Times carried a weekly
column entitled "Dead Water Needs Live Water to Rescue"
(pinyin: si shui yao hou shui yi)-a Chinese saying which, in
this case, was used to emphasize the importance of new
listings to stock market health. The author, National
Taiwan University Political Science Professor Chu Yun-han,
is a vocal critic of the Taiwan government.

3. In his article, Chu Yun-han says Taiwan's stock market
is doomed within ten years. He states that poor stock
market performance has dampened private consumption in
Taiwan and brought long-term recession to the services
sector. Chu focuses on the accelerated outflow of capital
and delisting from the market by a growing number of high-
tech companies. He says that the Hong Kong market has
performed better than Taiwan's counterpart, with a higher PE
ratio than Taiwan. (Note: Economists do not generally
consider PE useful for comparing the strength of markets.)
Chu concludes that the only way to rescue the Taiwan market
is to permit Taiwan business firms in China to list on the
Taiwan Stock Exchange (TSE).

4. The basic trends behind Chu's gloomy prediction are
simple. The TSE declined January - October 27, 2005 by
8.2%, while India's stock market index rose 16.4%, South
Korea's index rose 27.3%, and Singapore's stock index rose
6.1%. In US dollar terms, the TSE decline through October
27 was over 13%. So far in 2005, there have been eight new
TSE listings and 11 de-listings.

SIPDIS

Another View of Taiwan Stock Market
-----------------------------------

5. Former National Securities Investment Consultant Company
Chairman Huang Wen-jur told AIT he holds a much different
opinion on the state of TSE. He noted that published
statistics show that the TSE stock index shot up 42% in 2003-
2004. Huang also noted that the Morgan Stanley Capital
Index has repeatedly raised the weight given Taiwan shares
over the past two years, and the World Economic Forum has
ranked Taiwan the most competitive economy in Asia three
years in a row, leading many foreign portfolio investors to
invest in Taiwan.

6. BNP Paribas (Taiwan) Managing Director and Head of
Corporate Finance Peter Kurtz told AIT that despite its poor
performance this year, TSE has excellent potential. He
noted there was a decline in the number of listed companies,
but attributed this not to de-listings, but to the lack of
new companies listing. He thought this was partly a residue
of the excess number of companies created in the venture
capital boom of the 1990s and partly due to Taiwan companies
listing in Hong Kong or Shanghai instead of Taiwan. Kurtz
said that most of the companies most likely to consider new
listings are the offshore holding companies of Taiwan's
China-based operations, which are not currently permitted to
list on the TSE.

Higher Requirements Lead to Delisting
-------------------------------------

7. There are other explanations for the leveling off of TSE
listings. Regulators have stepped up surveillance and
accounting and financial statement requirements to
international levels, posing significant challenges for some
companies. The TSE forced nine (of the 11 companies that de-
listed so far this year) to de-list for failure to meet the
higher requirements. Taiwan companies listed on the Hong
Kong market are few, and their trading volumes generally
small. All but two of the roughly 30 Hong Kong-listed
Taiwan companies have virtually no turnover.

Stock Prices and Cross-Strait Restrictions
------------------------------------------

8. Chu Yun-han and Peter Kurtz both partly attribute the
poor TSE performance to restrictions on China-invested
companies listing on the TSE. Kurtz told AIT that beyond
allowing China-invested companies to list on the TSE, Taiwan
needed to lift all restrictions on Taiwan investment in
China. "Taiwan is closing itself off from the world's
fastest growing economy," Kurtz said.

9. However, the view that these restrictions and the
negatives trends in the TSE have had a major impact on
Taiwan's economic vitality is undercut by the fact that
Taiwan remains a major source of foreign direct investment
in China and two-thirds of Taiwan's offshore investment goes
to China. China takes over 25% of Taiwan's total exports and
over 40% of export orders placed with Taiwan companies are
filled by overseas production facilities (mostly in China).
It is unclear how much effect removing the investment
restrictions would have on Taiwan's stock market. Taiwan
companies might still continue to rely on their current
sources of capital.

10. According to Huang Wen-jur, removing restrictions
related to investment in China would facilitate Taiwan
companies raising capital, but would also expose Taiwan's
stock market to PRC manipulation. He said the PRC already
controls the Taiwan business associations in China by
assigning people to fill key positions in these
associations, who then put political pressure on association
members and the Taiwan government. He also noted that
Taiwan's regulators have no way to supervise and examine
Taiwan companies' operations in China.

Taiwan Continues to Attract Foreign Investors
---------------------------------------------

11. The flow of foreign investor capital into Taiwan
reached US$17 billion in 2004. The capital inflow in the
first half of 2005 more than doubled from a year ago to
US$15 billion. In Q3 of 2005, higher interest rates in the
United States, coupled with higher oil prices, prompted some
foreign portfolio investors to pull out funds from Taiwan
and other Asian economies. Nevertheless, the outward
remittances were offset by a greater capital inflow. (As of
October 28 this year, net capital inflow to Taiwan totaled
US$962.9 million, more than Thailand's net capital inflow of
US$235.8 million and India's net capital inflow of US$79.6
billion. South Korea posted a net capital outflow of US$258
million.)

Closer Correlation between US and Taiwan Markets
--------------------------------------------- ---

12. Taiwan's stock market performance correlates more to
the New York stock exchange than to markets in the East Asia
region because Taiwan is a major supplier of electronic
products to U.S. firms. Weaker demand in the United States
due to higher inventories contributed to a decline of 2% in
the Dow Jones stock price index and another decline of 1.1%
in Nasdaq in the first nine months of this year. During the
same period, Taiwan's stock price dropped 0.3%. Valuations
of Taiwan companies' production operations in China more
closely correlate with Hong Kong markets, and have been
impacted by retrenchment policies in China.

13. Chairman Huang Wen-jur and other local analysts
maintain that the decline in Taiwan stock market index this
year has been caused by short-term factors, rather than by
long-term factors. Cross-strait investment restrictions
have been in place for years and did not prevent Taiwan's
stock prices from rising 42% in 2003-2004.

14. Foreign portfolio investors' stock purchases have
amounted to NT$293 billion so far in 2005, more than their
stock sales of NT$38.7 billion, and more than stock
purchases for all 2004. Peter Kurtz told AIT that foreign
investors remain significantly underweight in the TSE
despite the substantial net inflows this year.

KEEGAN

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