NT Dollar Loans to Foreign Borrowers

UNCLAS AIT TAIPEI 003989 SIPDIS INFO USDOC WASHDC AMEMBASSY BANGKOK AMEMBASSY BEIJING AMEMBASSY SEOUL AMEMBASSY SINGAPORE AMEMBASSY TOKYO AMEMBASSY MANILA AMEMBASSY JAKARTA AMEMBASSY KUALA LUMPUR AMEMBASSY HANOI AMEMBASSY CANBERRA AMEMBASSY WELLINGTON AMCONSUL HONG KONG AMCONSUL SHANGHAI AMCONSUL GUANGZHOU DEPT OF TREASURY WASHDC SIPDIS, SENSITIVE BUT UNCLASSIFIED STATE PLEASE PASS AIT/W AND USTR STATE FOR EAP/TC, EAP/EP USTR FOR ALTBACH 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 E.O. 12958: N/A TAGS: EINV EFIN ECON PINR TW SUBJECT: NT Dollar Loans to Foreign Borrowers Ref: Taipei 2695 SUMMARY -------------- ¶1. (U) Taiwan's monetary authorities in November started permitting banking institutions to lend NT Dollars (NTD) to foreign borrowers in Taiwan which may be used to finance direct investment, securities trading, and real estate purchases. The new measure relaxes the conditions for using NTD loans as direct foreign investment (reported reftel) and is designed to reduce Taiwan's excess liquidity. End summary. Industry Regulations -------------- ¶2. (U) On November 13, Taiwan's Central Bank of China (CBC) and the Financial Supervisory Commission (FSC) issued a joint statement that banking institutions will be permitted to lend NTD to foreign borrowers without residence in Taiwan after the Bankers Association adopts a set of voluntary regulations, which it did late November. Relaxation -------------- ¶3. (U) According to the CBC, qualified foreign borrowers may be foreign individuals without permanent residence or foreign corporations without registration in Taiwan. NTD loans to these foreign borrowers may be used to finance such activities as securities trading, real estate purchases, direct investment projects, and acquisition and mergers. These NTD loans must be secured with collateral, except for intra-day loans which are used to pay for stocks purchased earlier the same day. To Reduce Excess Liquidity -------------- ¶4. (U) A CBC official told AIT/T that the new measure is designed to reduce excess liquidity which has kept yield rates on 10-year public bonds below 2%, the second lowest in the world after only Japan. The CBC official said low interest rates in Taiwan should attract foreign investors to use NTD loans to do merger and acquisitions (M&A) here. He further noted low interest will also attract hedge funds to borrow NTD loans to finance securities transactions. The CBC estimated that NTD loans required annually by hedge funds and foreign securities firms may reach NT$1.32 trillion (US$40 billion),equivalent to 90% of total postal savings currently placed on deposit with the CBC. COMMENT -------------- ¶5. (SBU) It is unsound to expect hedge funds to resolve domestic excess liquidity problems. The November 13 relaxation measure indicates the CBC's desperation to address excess liquidity issues which have remained in spite of the July 2006 measure permitting secured NTD loans to serve as foreign direct investment in Taiwan (reftel). The CBC needs to issue additional negotiable certificates of deposit to absorb excess liquidity from the banking system. The best solution would be a substantial expansion of private consumption and private investment. Young