MARKETS STEADY AS TAIWAN REACTS TO ANTI-SECESSION

UNCLAS SECTION 01 OF 02 TAIPEI 001171

SIPDIS

SENSITIVE

DEPT FOR EAP/TC, EAP/EP AND EB/IFD/OIA
DEPT PLEASE PASS AIT/W AND USTR
USTR FOR SCOTT KI
USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER
USDOC FOR 3132/USFCS/OIO/EAP/ADAVENPORT
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TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF
GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN

E.O. 12958: N/A
TAGS: EFIN EINV ECON TW
SUBJECT: MARKETS STEADY AS TAIWAN REACTS TO ANTI-SECESSION
LAW

REF: TAIPEI 1029

Summary
--------------


1. (SBU) Taiwan's stock market showed a significant drop
March 14 and 15 as the PRC passed the Anti-Secession Law and
Taiwan's officials reacted. The NT dollar also lost value.
However, it is unclear whether these declines were a result
of the Anti-Secession Law or completely unrelated factors.
Regardless, the stock market's slight recovery on March 16
showed that nerves were calming. Investors may be
withholding judgment to see how Taiwan reacts in the days
leading up to the March 26 protest demonstration in Taipei.
If the Chen administration can maintain a fairly moderate
response, the markets may not be affected at all. End
summary.


The Markets React...to What?
--------------


2. (U) On March 14, 2005, the PRC's National Peoples'
Congress enacted the Anti-secession Law after releasing its
complete text for the first time. Although President Chen
Shui-bian initially remained uncharacteristically quiet, his
administration's officials responded with strong
condemnation. Taiwan authorities have called for a one
million-person demonstration in Taipei on March 26 to protest
the laws.


3. (U) Taiwan's stock price index lost 140.75 points during
March 14 and 15 to 6,063.48 points. The single-day loss on
March 15 was 1.5 percent. Over 80 percent of listed issues
posted stock price losses on March 15. Foreign portfolio
investors sold more than they purchased. Their net stock
sales totaled NT$2.4 billion on March 14 and NT$3.3 billion
on March 15. The NTD depreciated 1.2 NT cents on March 14
and 16.8 NT cents on March 15 to NTD 31 per USD. However,
markets may also have been responding to expectations of an
interest rate hike by the U.S. Federal Reserve Board on March
22 that generally weakened Asian currencies.

...and Return to Calm
--------------


4. (U) After Monday's and Tuesday's declines, Taiwan's stock
market index inched up 0.15% March 16 to close at 6,072.36
points. Of 1,007 issues listed on the stock market, 48.7%
reported drops in stock prices on March 16, much less than
the 82.5% of listed stocks a day earlier. Foreign investors
again posted net stock sales of NTD 5.5 billion on March 16.
The March 16 trading volume of NT$59.5 billion was less than
the normal daily volume of NT$80-100 billion. Huang Wen-jur,
a senior consultant to the SinoPac Securities Company, told
AIT/T that the smaller trading volume reflected portfolio
investors' wait-and-see attitude.



5. (U) On the foreign exchange market, the NT dollar lost 2.7
NT cents to NT$31.027 per US dollar. The depreciation of 2.7
NT cents on March 16 was much smaller than the decline on
March 15. The trading volume of US$1.2 billion was also
lower than US$1.5 billion on the previous day. Alex Pan, a
senior foreign exchange trader with the Bank of America,
commented that Taiwan's market had been relatively calm
because the NT dollar's depreciation of 0.6% against the US
dollar on March 15 and 16 was much less than the 2%
devaluation for Korean won.

No Capital Flight
--------------


6. (SBU) There has been no evidence of capital flight in
reaction to the Anti-Secession Law. George Chou, Director
General of the CBD's Foreign Exchange Department (strictly
protect),told AIT/T that on March 15 foreign portfolio
investors continued to post net inward remittances of dozens
of millions of USD. On May 16 and 17, there was some small
capital outflow because hedge funds pulled money out of Asia,
including Taiwan, South Korea, Singapore, Malaysia, and
Indonesia. George Chou quoted a source at State Street, one
of the three largest custodian banks in the United States, to
explain that hedge fund withdrawals from Asia in general was
one main cause for recent weakness of Asian currencies.

Comment ) Market Holding Its Breath
--------------


7. (SBU) It is not clear whether the modest declines in the
stock market and the value of the NT dollar early this week
were a reaction to the release of the full text of the PRC's
Anti-Secession Law, its passage by the National People's
Congress, Taiwan officials' response or any number of other
factors completely unrelated to the new law. Regardless, the
reaction was small. Wednesday's slight stock price recovery
shows that the markets' nerves are relatively steady as it
waits to see the results of moves and countermoves by Taiwan
and the PRC in the days leading to the March 26 protest
demonstrations in Taipei. If the PRC's actions, the
international reaction, and the domestic political
environment offer the Chen administration the maneuverability
to maintain some measure of moderation in its response, then
the Anti-Secession Law could turn out to be a non-event for
Taiwan's financial markets. End comment.
PAAL