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Cablegate: Dump Bian Campaign Impacts Markets

VZCZCXRO8281
RR RUEHGH
DE RUEHIN #2911 2350720
ZNR UUUUU ZZH
R 230720Z AUG 06
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC 1768
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUCPDOC/USDOC WASHDC
RUEHBK/AMEMBASSY BANGKOK 3386
RUEHBJ/AMEMBASSY BEIJING 5563
RUEHUL/AMEMBASSY SEOUL 8030
RUEHGP/AMEMBASSY SINGAPORE 6585
RUEHKO/AMEMBASSY TOKYO 7952
RUEHML/AMEMBASSY MANILA 9784
RUEHJA/AMEMBASSY JAKARTA 3912
RUEHKL/AMEMBASSY KUALA LUMPUR 3549
RUEHHI/AMEMBASSY HANOI 3118
RUEHBY/AMEMBASSY CANBERRA 4295
RUEHWL/AMEMBASSY WELLINGTON 1546
RUEHHK/AMCONSUL HONG KONG 6777
RUEHGH/AMCONSUL SHANGHAI 0325
RUEHGZ/AMCONSUL GUANGZHOU 9504

UNCLAS TAIPEI 002911

SIPDIS

SIPDIS

STATE PLEASE PASS USTR

STATE FOR EAP/RSP/TC, EAP/EP

USTR FOR ALTBACH

USDOC FOR 3132/USFCS/OIO/EAP/WZARIT
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

E.O. 12958: N/A
TAGS: EINV EFIN ECON PINR TW
SUBJECT: Dump Bian Campaign Impacts Markets


1. Summary. Financial analysts view the campaign to force
President Chen Shui-bian to resign as a primary cause of the August
22 stock index plunge of 3.2% in the Taiwan stock index. Local
institutional investors who are more concerned over political unrest
than their foreign counterparts sold stocks, while foreign portfolio
investors registered net stock purchases, viewing the drop as
temporary and a good buying opportunity. End Summary.

Campaign to Overthrow President Chen
------------------------------------

2. Former DPP Party Chairman Shih Ming-te is leading a campaign to
force President Chen Shui-bian to resign. Shih will organize a
large-scale sit-in in front of the Presidential Office which may
prevent the President's office from normal functioning. This
campaign, together with the PRC (Taiwan's main trading partner)
unexpectedly raising interest rates by 0.27 percentage points on
August 18, roiled Taiwan's financial markets on August 21, a Senior
Market Analyst at Merrill Lynch told AIT.

Stock Market Plunges
--------------------

3. The Analyst explained that local portfolio investors' fear that
demonstrations may lead to violent political unrest prompted
Taiwan's stock price index to plunge 3.2% to close August 21 at
6,420.01 points. The share prices of 92% of the 1,164 listed
companies declined. Seventy-two companies saw their share prices
hit the daily limit of 7% decline. The 3.2% fall in Taiwan's share
price index, the fourth deepest drop so far this year in Taiwan, was
far more than the stock price declines of other Asian markets (1.86%
in Hong Kong, 0.85% in Tokyo, 0.71% in Seoul, and 0.65% in
Singapore).

NTD Depreciates against USD
---------------------------

4. The NTD depreciated 0.07% to close August 21 at NT$32.69 per
USD, against the trend of other currencies in East Asia which gained
strength against the USD. The Japanese Yen appreciated 0.5% and the
Korean Won and the Singaporean Dollar appreciated 0.2%. The Hong
Kong Dollar depreciated 0.01% against the USD.

Foreign Investors See Unrest as Buying Opportunity
--------------------------------------------- -----

5. On August 21, local institutional investors who are more
sensitive to political unrest than foreign investors sold NT$3.55
billion (US$109 million) more stocks than they bought. In contrast,
foreign portfolio investors made net stock purchases of NT$1.88
billion (US$57.8 million), sending their net stock purchases so far
in August to NT$45.9 billion (US$1.4 billion). Stock market
analysts of Morgan Stanley, Citibank, and Chase believe that the
financial impact of the campaign against the President will be
short-lived and that excess liquidity will eventually drive stock
prices up again. A Citibank email of August 22 advised "we believe
political turmoil and angry mobs are a Buy indicator in Taiwan."
However, the Merrill Lynch analyst predicted further declines,
perhaps down to 6300, may be in store in the run-up to the December
mayoral elections in Taipei and Kaohsiung. Most analysts believe
that Taiwan's stock prices will rebound in the next few days. (The
stock price index rose 84 points to close August 22 6,590 points.)

YOUNG

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