Cablegate: Ntd Loans Considered Foreign Direct Investment

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DE RUEHIN #2695 2210855
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R 090855Z AUG 06
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E.O. 12958: N/A
TAGS: EINV EFIN ECON PINR TW
SUBJECT: NTD Loans Considered Foreign Direct Investment

SUMMARY
-------

1. Taiwan monetary authorities recently began permitting secured NT
dollar (NTD) bank loans to serve as foreign direct investment (FDI)
in Taiwan as a way to absorb excess liquidity. However, Taiwan's
financial supervisory authorities are concerned that Taiwan
companies may be vulnerable to hostile foreign acquisition funded
through this channel. END SUMMARY.

Relaxation
----------

2. Taiwan's Foreign Investment Commission (FIC) announced on July
28 it will expand the permissible sources of FDI to include secured
NTD loans provided by Taiwan banks from foreign currency remitted
into Taiwan. However, foreign investment projects funded by local
secured NTD loans are subject to strict requirements, including
certification of the investment and operation plans, submission of a
draft loan contract, and regular post-investment submission of
certified financial statements. The foreign investors must be
multinational corporations or actually engaged in business
activities.

3. "Paper companies" registered with such tax havens as Caiman and
Virgin Islands may not enjoy the privilege. In addition, the
capital must come from banks. Capital from other financial
institutions, such as insurance firms, is not permitted.

Industry and Management Technologies
------------------------------------

4. This new provision and the abundance of available NTD funds
should attract foreign investors who will bring in industry and
management technologies, according to an FIC division chief. The
FIC is currently reviewing several projects funded with capital from
secured loans provided by local banks.

To Address Excess Liquidity
---------------------------

5. An important reason for the new provision is that Taiwan's
Central Bank of China (CBC) wants to absorb excess liquidity in the
banking sector by allowing foreign investors to obtain capital
needed for their FDI projects from the local banking sector. A
senior CBC official told AIT/T that the CBC originally suggested the
relaxation. According to the official, excess liquidity has
contributed to the very narrow interest rate gaps between deposits
and loans which, together with delinquent credit and cash card debt
problems, are major factors behind 14 of 45 Taiwan banks reporting
losses in the first half of 2006.

6. According to the FIC division chief, the Financial Supervisory
Commission (FSC) opposed the CBC's suggestion during interagency
discussions in late July. The FSC is concerned that Taiwan
companies, particularly banks and other financial institutions, may
be vulnerable to hostile acquisitions if foreign investors can use
local capital obtained from local banks.

Young

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