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Cablegate: Taiwan Adopts Price Stabilization Measures

VZCZCXRO0124
RR RUEHGH
DE RUEHIN #1733 2150641
ZNR UUUUU ZZH
R 030641Z AUG 07
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC 6236
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUCPDOC/USDOC WASHDC
RUEHBK/AMEMBASSY BANGKOK 3788
RUEHBJ/AMEMBASSY BEIJING 7092
RUEHUL/AMEMBASSY SEOUL 8808
RUEHGP/AMEMBASSY SINGAPORE 6964
RUEHKO/AMEMBASSY TOKYO 8966
RUEHML/AMEMBASSY MANILA 0121
RUEHJA/AMEMBASSY JAKARTA 4118
RUEHKL/AMEMBASSY KUALA LUMPUR 3796
RUEHHI/AMEMBASSY HANOI 3365
RUEHBY/AMEMBASSY CANBERRA 4575
RUEHWL/AMEMBASSY WELLINGTON 1850
RUEHHK/AMCONSUL HONG KONG 8340
RUEHGH/AMCONSUL SHANGHAI 1262
RUEHGZ/AMCONSUL GUANGZHOU 0440

UNCLAS TAIPEI 001733

SIPDIS

SIPDIS

STATE PLEASE PASS USTR
STATE FOR EAP/RSP/TC, EAP/EP
USTR FOR ALTBACH AND STRATFORD
USDOC FOR 3132/USFCS/OIO/EAP
TREASURY FOR OASIA/TTYANG
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF
GOVERNORS, SAN FRANCISCO FRB/TERESA CURRAN, AND NEW YORK FRB MARI
BOLIS

E.O. 12958: N/A
TAGS: EINV EFIN ECON PINR TW
SUBJECT: Taiwan Adopts Price Stabilization Measures

1. SUMMARY: In response to recent price rises, Taiwan authorities
have adopted a series of measures, including import duty cuts for
grain, an export ban on waste paper, enhanced vigilance on price
hike collusion, and new gasoline price subsidies (septel). Although
Taiwan's annualized inflation rate remains at 0.6%, authorities are
concerned about potential inflationary increases, and are therefore
trying to keep a lid on prices. Economic forecasters and
businesspeople comment that these measures will be unlikely to
harness growing inflationary pressure. Predictions for future
inflation rate are a 13-year quarterly high of 3.8% in the last
quarter of this year. END SUMMARY.

Six Measures
------------

2. After its weekly cabinet meeting on August 1, the Executive Yuan
(EY) announced six price stabilization measures. The Ministry of
Economic Affairs (MOEA) will change the weekly gasoline price
adjustment system to keep prices lower, in addition to the gasoline
price subsidies for buses and taxis adopted in late July (septel).
For the next six months, the Ministry of Finance (MOF) will cut
import duties for grain products in half.

3. The MOEA and the Fair Trade Commission (FTC) will conduct
enhanced monitoring of price collusion. Premier Chang Chun-hsiung
suspects, for example, that price collusion may affect corn, whose
price has recently increased by 4.7% in Taiwan, versus a 17.1%
decline in international prices.

4. Concerned that higher prices offered by foreign buyers are
driving up domestic prices, the MOEA will temporarily limit exports
of such products as iron & steel, gasoline, diesel fuel, waste
paper, and sand & gravel. On a broader level, the MOEA also plan to
launch an energy conservation campaign and promote renewable energy
development.

Monetary Instruments
--------------------

5. Our contact of the Central Bank of China (Taiwan) (CBT)
confirmed press reports that during the cabinet meeting, CEPD
Chairperson Ho Mei-yueh proposed that the EY include the NT$
exchange rate and monetary instruments among the price stabilization
measures. CBT Governor Perng Fai-nan refused, however, and said the
NT$ exchange rate should not be used as a price stabilization
instrument. According to Perng, the CBT has done its part in
fighting inflation by raising benchmark interest rates every quarter
over the past three years. Perng also indicated that the CBT has
stepped up its open market operations, thereby reducing money supply
growth.

Comment
-------

6. These price stabilization measures are likely to be ineffective
as the current inflation threat stems primarily from import cost
hikes beyond Taiwan's control. The Wheat Importers Association, for
example, notes that the duty cuts are not enough to offset wheat
import cost increases. Local economic forecasters, therefore, still
anticipate that the inflation rate will increase from below one
percent in the first half of this year to over three percent in the
second half, with the Taiwan Institute of Economic Research's
forecast rate reaching a 13-year quarterly high of 3.8% in the last
quarter of this year.

YOUNG

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