Economic Briefing for April 2006

UNCLAS SECTION 01 OF 03 TAIPEI 001469 SIPDIS 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 SUBJECT: Economic Briefing for April 2006 ¶1. This cable summarizes selected recent economic events in Taiwan in April 2006: --Exports boost Q1 economic growth --Central Bank fights inflation --U.S. companies eye Taiwan lottery --Irony: PRC words and deeds --KMT-CCP meeting improves cross-Strait relations --WTO consultations with PRC --Card debt erodes bank profitability --COSMIC III launched --Alcatel WiMAX testing center --TFT-LCD Merger - AUO and Quanta Display --PRC Gravel Export Ban Export Expansion behind Taiwan's Economic Growth in Q1 -------------- -------------- ¶2. Taiwan's economy performed well in Q1 of 2006 due to strong foreign demand for Taiwan-made electronic products. Both official and private think tanks estimate real GDP growth rates for Q1 exceeded five percent. Export orders received in Q1 increased 21% from a year ago, contributing to a double-digit export growth and the second highest manufacturing growth of 8% in the past two years. Growing foreign demand will continue to be a driving force behind Taiwan's economic growth for the rest of 2006, but the momentum may be partly offset by tighter money supply policy, reduction of loans to credit/cash card holders, and higher oil prices. The Chunghua Institution for Economic Research recently lowered its estimate of Taiwan's 2006 real GDP growth from 4.2% to 3.8% and raised its estimate of inflation from 1.8% to 2.2%. Taiwan Central Bank Tightening Money Supply -------------- ¶3. Taiwan's Central Bank of China (CBC) has moved against growing inflationary pressure. On March 31, it raised its benchmark interest rates by 0.125 percentage points to a 54-month high of 2.375% and has absorbed excess liquidity by issuing NT$220 billion (US$6.8 billion) of negotiable certificates of deposit (NCDs). Consequently, the M1b measure of money supply growth in March declined to 4.3%, the lowest in 54 months. Taiwan Lottery -------------- ¶4. On April 17, AIT ECON and COMM called on Ministry of Finance National Treasury Agency Director to highlight U.S. companies' continuing interest in the contract for the hardware and software for the Taiwan lottery. The U.S. company G-Tech has held the contract for Taiwan's lottery since an official large-scale lottery began in 2002 and is one of two U.S. companies bidding on the $70 million contract for the 2007-2014 time period. Taiwan's official lottery takes in $2.5-3 billion per year. Approximately 13% of revenue generated is used to cover operating expenses and most of the rest is used to assist local governments. Irony -------------- ¶5. On April 17, while PRC officials were greeting the Taiwan delegation led by Lien Chan and calling for more interaction between the PRC and Taiwan, in Taipei Tokyo Mayor Shintaro Ishihara was TAIPEI 00001469 002 OF 003 complaining to the media about Beijing's boycott of the Asian Network of Major Cities 21 (ANMC21) annual convention because Taipei hosted the event this year. The 2006 annual convention of ANMC21 issued a "Taipei Declaration" on April 13 with mayors and representatives from Tokyo, Singapore, Seoul, New Delhi, Bangkok, Jakarta, Hanoi, Manila, Kuala Lumpur and Taipei pledging to promote information technology to enhance urban functions and civil services, and to keep working together to tackle challenges including environmental issues. KMT-CCP Economic Forum - Taiwan Government Moves First -------------- -------------- ¶6. Mainland Affairs Council Chairman Joseph Wu announced April 12 that Taiwan might unilaterally lift restrictions on PRC tourist travel to Taiwan if the two sides are unable to successfully conclude cross-Strait industry-led consultations within six monts. The Chen Administration may have made the announcement in part to preempt an expected PRC announcement of further liberalization of cross-Strait tourism at the KMT-Chinese Communist Party economic forum in Beijing. Wu also announced that if the two sides cannot fully conclude consultations on routine passenger and cargo charter flights, they might implement interim steps such as additional holiday charter flights, humanitarian charter flights or special purpose cargo charter flights. ¶7. The two-day cross-Strait economic forum between the KMT and Chinese Communist Party concluded in Beijing on April 15. About 50 senior executives from leading Taiwan companies, whose combined production accounts for over 50% of the island's GDP, attended the meeting. At the closing ceremonies, the PRC announced 15 measures to relax cross-Strait economic restrictions. The PRC released new regulations permitting PRC tourists to visit Taiwan and expanded the number of cities where Taiwan travelers can obtain travel documents on arrival. It approved seven additional categories of fruit, eleven categories of vegetables and eight categories of seafood for duty-free import from Taiwan. It also announced the establishment of special investment zones for Taiwan farmers and a distribution center for Taiwan agricultural products. Import Relief -------------- ¶8. On April 25, Taiwan requested consultations with the PRC in Geneva under the WTO framework on towel imports. Taiwan will adopt the defensive measures allowed by WTO rules if the PRC fails to reach agreement with Taiwan. On March 17, Taiwan's International Trade Commission (ITC) found that towels imported from China have damaged Taiwan's towel industry, and that the prices have constituted "dumping." On April 14, the ITC proposed the government raise import tariffs from 10.5% to 66% on towels coming from China. Card Debt Impacts Taiwan Banks -------------- ¶9. The majority of delinquent card debtors started rescheduling negotiations with banks prior to the deadline of April 10 set by Taiwan's bank regulator. Meanwhile, card issuers have stepped up their efforts to write off delinquent card debts to avoid card-related NPL ratios exceeding the 3%-cap. Bad debt written off in March 2006 increased to a record high of NT$21.7 billion (US$669 million),three times the amount of six months ago. Consequently, Taiwan banks' pretax profits in Q1 of 2006 dropped 42% from a year TAIPEI 00001469 003 OF 003 ago to NT$27 billion (US$830 million). COSMIC III to Improve Taiwan's Weather Forecast -------------- -------------- ¶10. On April 15, COSMIC III, Taiwan's first weather satellite, was successfully launched from Vandenberg Air Force Base, California. The satellite was assembled by Taiwan's National Space Program Office, and its construction and launch cost totaled NT$4.3 billion. According to experts, it will increase the accuracy of Taiwan's weather forecast by 15%. Alcatel to Set up WiMAX Testing Center in Taiwan -------------- --- ¶11. French telecom giant Alcatel plans to open a fourth-generation telecom WiMAX testing center in Taiwan with an investment exceeding NT$100 million (US$3.1 billion). WiMAX has been considered a possible successor to current wireless telecom technologies. Alcatel will work with Taiwan company ZyXEL to use the center on development of wireless broadband services, and will strengthen cooperation with Taiwan's internet protocol telecom companies. Alcatel has also worked with Taiwan's Hon Hai Precision Industry and ZyXEL on ADSL (the current wireless telecom technology) services, and is one of the major ADSL suppliers for Chunghwa Telecom. In addition, Alcatel has opened other development centers in Taiwan, including a third-generation telecom Internet research center called the 3G Reality Centre, and an information and telecommunications R&D center. TFT-LCD Merger - AUO and Quanta Display -------------- ¶12. On April 7, AU Optronics (AUO),Taiwan's largest maker of thin film transistor-liquid crystal display (TFT-LCD) flat panel displays, announced that it would buy smaller Taiwan rival Quanta Display through a stock swap. The deal gives the combined firm a 17 percent market share but still leaves it the world's third largest TFT-LCD producers after Korea's Samsung and LG Philips. Construction Will Suffer from PRC Gravel Export Ban -------------- -------------- ¶13. The PRC announced on April 17 that it would ban all exports of gravel on May 1, 2006. The ban will hurt Taiwan's construction sector, which relies heavily on PRC gravel. Over 20 percent of Taiwan's gravel comes from the PRC, and Taiwan buys 60 percent of the PRC's gravel exports. The Ministry of Economic Affairs plans to ease Taiwan's gravel mining regulations and assist firms to search for new sources overseas, including the Philippines and Vietnam. YOUNG