Identifier
Created
Classification
Origin
06TAIPEI10
2006-01-03 22:42:00
UNCLASSIFIED
American Institute Taiwan, Taipei
Cable title:  

Economic Briefing for December 2005

Tags:  EINV EFIN ECON PINR TW ESTH 
pdf how-to read a cable
This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 04 TAIPEI 000010 

SIPDIS


STATE PLEASE PASS AIT/W AND USTR

STATE FOR EAP/RSP/TC, EAP/EP

USTR FOR WINTER AND WINELAND

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 ESTH
SUBJECT: Economic Briefing for December 2005

UNCLAS SECTION 01 OF 04 TAIPEI 000010

SIPDIS


STATE PLEASE PASS AIT/W AND USTR

STATE FOR EAP/RSP/TC, EAP/EP

USTR FOR WINTER AND WINELAND

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 ESTH
SUBJECT: Economic Briefing for December 2005


1. This cable summarizes selected recent economic events in
Taiwan in December 2005:

-- Macro Economic Performance
-- Taiwan-China Integration
-- Taiwan Banks
-- New Tax
-- Finance Reform
-- Plan to Attract Investment
-- High-speed Rail
-- Scientific Cooperation
-- Avian Influenza

Macro Economic Performance
--------------


2. Taiwan's economy in the second half of 2005 rebounded
from the impact of higher oil prices and higher interest
rates that had dampened consumer demand in the United
States, Japan, and Europe earlier this year. Y-o-y growth
in Taiwan exports accelerated from below 5% in May and June
this year to an average of 14% in October and November.
Manufacturing production went from a 1% contraction in Q1 to
y-o-y growth of 4% in Q3, 8% in October, and 10% in
November. The service sector, accounting for 73% of
Taiwan's total GDP, continued to expand in the second half
of this year. On the other hand, agriculture, accounting
for less than 2% of GDP, experienced further contraction
this year due to bad weather and inability to compete with
imported products. The unemployment rate in November
declined to 3.9%, the lowest since April 2001. The consumer
price index in November fell to 2.47%, down from a 7-year
high of 3.58% in August.


3. Both government and private think tanks predict Taiwan's
economic growth in 2006 will be at or above 4%, based on
expectations that developed nations will stimulate private
consumption, and thus increase demand for Taiwan's exports.
Growth in private investment in Taiwan in 2006 is expected
to remain below 5% due to over-expansion in 2004. The
Academia Sinica is concerned that the alternative minimum
tax, due to start January 2006, will dampen private
consumption and investment. Nevertheless, the Council for

Economic Planning and Development, Taiwan's official
economic planning agency, predicts real GDP growth of 4.5%
in 2006 (predictions from other institutions include 3.3% by
Global Insight, 4.1% by the World Bank and Asian Development
Bank, 4.3% by the International Monetary Fund, 4% by Taiwan
Institute of Economic Research and Chunghua Institution for
Economic Research, 4.1% by the Directorate General of
Budget, Accounting and Statistics (DGBAS),and 4.25% by
Academia Sinica). The DGBAS, Taiwan's official statistical
agency, predicts per capita GNP will reach US$15,623 in

2006.

China Replaces USA as 2nd Major Source of Imports
-------------- --------------


4. Taiwan's rapidly growing economic integration with China
has led to China surpassing the United States as Taiwan's
second major source of imports. In September 2005 Taiwan's
imports from China totaled US$1,643 million, for the first
time exceeding the US$1,569 million of imports from the
United States. The gap broadened in October to US$1,774.3
million from China versus US$1,689.7 million from the United
States. (Cross-strait trade statistics from the Bureau of
Foreign Trade are currently available only through October
2005.) Taiwan's total imports have grown by double-digit
rates over the past four years while imports from the United
States have experienced a y-o-y decline for the past six
months. China replaced the United States as Taiwan's major
export destination in 2002. The percentage share of exports
to China has steadily increased from 19.6% in 2001 to 28% in
September 2005. Meanwhile, the share of exports to the
United States steadily fell from 22.5% to 14%. The gap will
continue to broaden as Taiwan manufacturing firms increase
production in China.

Improvement in Taiwan Banks
--------------


5. Taiwan banks significantly improved their financial
standing in November 2005. Efforts to write-off bad debt
and sell problem assets contributed to a decline of NT$29.3
billion in non-performing loans (NPL) in November to
NT$425.8 billion, 36% below a year ago. Average NPL ratios
in November dropped to 2.61%, down from nearly 12% in March
2002, 4.35% in November 2004 and 2.81% in October 2005. The
number of local banks reporting NPL ratios above the 5%
limit set by the Financial Supervisory Commission (FSC) in
November 2005 fell to five from 29 a year earlier, and among
the five, only three reported capital adequacy ratios below
the FSC minimum requirement of 8%. One of the three
(Business Bank of Hualien, BBH) was sold to Nassau Inn for
NT$1,000 million (US$30 million) on November 28. Nausau is
expected to improve and sell BBH rather than to hold and
manage it.


6. In November 2005, seven of the nine remaining state-
controlled banks reported declines in NPL ratios. The
exceptions were Bank of Taiwan's NPL ratio in November
increased to 1.61% from 1.53% in October, and Huanan
Commercial Bank's remained unchanged at 1.80%. Changhwa
Commercial Bank wrote off NT$32.1 billion of bad debt in
November, resulting in a drastic drop in its NPL ratio from
5.36% in October to 1.76% in November. Taishin Financial
Holding replaced the Ministry of Finance to become the
largest shareholder in September 2005. The November NPL
ratios of the four other state-controlled banks together
with their October figures in parentheses are as follows:
--Land Bank of Taiwan: 3.34 (3.44%)
--Cooperative Bank of Taiwan: 3.21% (3.33%)
--Huanan Commercial Bank: 2.27% (2.31%)
--Business Bank of Taiwan: 4.57% (4.60%)

Legislation of Alternative Minimum Tax
--------------


7. On December 9, Taiwan passed a tax reform bill
establishing an alternative minimum tax mechanism (AMT),
Taiwan's first new tax in 20 years. The AMT will affect
only businesses with annual income above NT$2 million and
individuals with annual income above NT$6 million. The AMT
tax rate will be 20% for individuals and 10 - 12% for
businesses. The AMT will affect only about 0.3% of
individual taxpayers and 0.9% of business firms, but will
have a disproportionate impact on high-tech industries
because of the tax exemptions they currently enjoy.
Business leaders warn that the AMT may prompt further
industrial relocation offshore and emigration of high-income
people. The tax has broad popular support. Senior
executives from some of Taiwan's leading information
technology (IT) companies have publicly supported expanding
taxation to high-tech firms. They believe that Taiwan's
industry is well able to absorb what they perceive to be a
fairly modest tax increase.

Progress in Second Stage of Finance Reform
--------------


8. In spite of strong resistance from labor unions and
opposition legislators, Taiwan has accomplished two of the
three goals for 2005 set in its second stage of financial
reform. The goal not attained was that of selling
controlling interest in a state-owned bank to foreign
investors. Nevertheless, the MOF sold 22.5% of equity in
Changhwa Commercial Bank to Taishin Financial Holding in
July 2005. The Taiwan Development and Trust Company
retreated from the banking sector in January 2005 by selling
its banking department to Jihsun International Commercial
Bank. The MOF merged seven state-owned banks into three in
Q4 2005, reducing the number of state-owned banks to six
(i.e., Bank of Taiwan (BOT),Mega Commercial Bank (MCB),
Cooperative Bank of Taiwan (CBT),Land Bank of Taiwan, First
Commercial Bank, and Huanan Commercial Bank). The three
merger cases are as follows:

-- On November 8, Cooperative Bank of Taiwan (CBT) announced
its merger with Farmers Bank of China (FBC). The merger of
these two banks will make CBT the third largest bank with a
market share of 10% in assets.

-- On November 17, Bank of Taiwan (BOT) announced it would
take over the banking department of the Central Trust of
China. This acquisition will increase the BOT's market
share to 11.59% in assets, the largest among local banks.

-- In October, the Mega Financial Holding Company (MFHC)
decided to merge its two subsidiary banks (i.e.,
International Commercial Bank of China and Chiao Tung Bank)
into Mega Commercial Bank (MCB) in March 2006. The MFHC
announced on December 16 it had acquired 26% equity in
Business Bank of Taiwan (BBT) and will merge BBT into MCB
over the next three years. The merger will make MCB the
second largest bank with market share of 10.89% in assets.

EY Revitalization Plan to Attract Investment
--------------


9. On November 28, 2005, Taiwan's Executive Yuan (EY)
announced six measures to encourage "traditional"
industries (non-high-tech) to invest in Taiwan. The
measures target Taiwan firms that have invested in
China. The EY hopes these measures will boost
investment in Taiwan by NTD 137 billion (about USD 4
billion). The measures include funding for subsidized
rents in industrial parks, expansion of existing
industrial parks, low-interest financing for investors,
converting two industrial parks into free trade zones,
and permitting additional employment of foreign workers
by firms in labor-intensive industries. Some observers
have pointed out that the new alternative minimum tax
(see para 7) will counteract some of the benefits that
these six measures are intended to create.
MOTC Considering Buying High-Speed Rail
--------------


10. On December 26, the Ministry of Transportation and
Communications (MOTC) Minister Lin Ling-san confirmed
that the Taiwan government was considering buying the
build-operate-transfer (BOT) high-speed rail project
now underway. Also on December 26, MOTC released a
report on the financial situation of the Taiwan High-
Speed Rail Corporation (THSRC). The report indicated
that the one-year postponement of the high-speed rail's
inauguration would raise the total cost of the project
by NT$ 14 billion (about USD 426 million) to NT$ 480
billion (USD 14.6 billion). MOTC estimated that THSRC
needed to raise at least NT$ 65 billion (USD 2 billion)
in additional capital to complete the project, twice
previous estimates.

Scientific Cooperation
--------------


11. AIT/ESTH participated in an NSF-Taiwan NSC discussion
of Taiwan's participation in the Atacama Large Millimeter
Array (ALMA) project to build an array of 50 radio
telescopes in the Atacama Desert of Chile. Taiwan will
provide about $30 million funding for the project over a ten-
year period, enough for two or three of the telescopes. A
letter of intent was signed at the end of the visit by the
NSF staff with the proviso that AIT and TECRO should sign an
agreement on the matter before funding is committed.

U.S. Companies Prepare for Avian Influenza
--------------


12. On December 16, Corning Company Taiwan gave an Avian
Influenza (AI) presentation to Amcham which focused on the
lessons Corning had learned from dealing with the SARS
outbreak of 2003 on strategies to combat infectious disease
outbreaks. Corning said it would rely on local government
to provide Tamiflu, if needed. The presentation was an
indication of the preparations for AI that some U.S.
companies have made.

PAAL