U.S. TREASURY OFFICIALS HEAR CALLS FOR MORE

C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 002284

SIPDIS

SIPDIS

STATE PASS USTR, STATE FOR EAP/TC,USTR FOR STRATFORD AND
KATZ, TREASURY FOR OASIA/TTYANG AND HAARSAGER, COMMERCE FOR
4431/ITA/MAC/AP/OPB/TAIWAN

E.O. 12958: DECL: 10/04/2017
TAGS: ECON EFIN ETRD PREL TW
SUBJECT: U.S. TREASURY OFFICIALS HEAR CALLS FOR MORE
LIBERALIZATION


Classified By: Economic Chief Hanscom Smith for reasons 1.4 (b) and (d)
.


1. (C) SUMMARY. In the first visit of U.S. Treasury officials
to Taiwan in more than two years, East Asia Director Mathew
Haarsager and Taiwan Desk Officer TT Yang met with a variety
of Taiwan financial sector authorities, economists, and U.S.
and local business people. Business people and economists
argued for faster cross-Strait liberalization and service
sector reforms, especially in the financial sector. Most
interlocutors expected more cross-Strait liberalization after
the March 2008 presidential elections. Financial regulators
and the Central Bank discussed possible tax reform and bank
policy and predicted another rate hike. END SUMMARY.


2. (SBU) U.S. Treasury Office of East Asia Director Mathew
Haarsager and Taiwan Desk Officer TT Yang's September 26-28
visit to Taiwan included meetings with the Chunghua Institute
for Economic Research (CIER),the Taiwan Institute of
Economic Research (TIER),the Council for Economic Planning
and Development (CEPD),the Central Bank of China, the
Mainland Affairs Council, the Ministry of Finance, the
Financial Supervisory Commission, the American Chamber of
Commerce, and private sector banking and financial experts.
This was the first visit by U.S. Treasury officials to Taiwan
in more than two years.

Amcham Asks For Tax Agreement and Liberalization
-------------- ---

3. (SBU) In a breakfast meeting with Amcham members mainly
from the financial sector, U.S. firms complained that Taiwan
was missing significant opportunities to grow its economy by
moving too slowly on cross-Strait liberalization and failing
to push reforms that would allow for development of the
service sector. Some argued that Taiwan had a "bifurcated
economy" with high-tech firms and China-related businesses
doing very well and "everything else" not. Further, Taiwan,s
economy was losing competitiveness regionally, hampered by
non-transparent and poorly implemented regulation.


4. (SBU) Amcham members stated regulators were moving far too
slowly to rationalize the financial sector, noting that 50%
of the banking sector is still controlled by state-owned
banks. One banker described the banking industry here as "too
liquid, too crowded and too competitive." Foreigners are
still buying banks here, however, because the market is
potentially very lucrative, and with a freeze on new
branches, that is the one way foreign banks could expand
here. A number of foreign banks are hoping to attract Taiwan
firms with operations in China that cannot be served by local
Taiwan banks. (Note: Taiwan banks are not allowed to operate
in China. End note). Business representatives argued that
Taiwan regulators should better consult foreign banks, who
are often "more advanced operators" compared with their local
counterparts. Instead, regulators tend to rely on
consultations with local business groups in which foreign
firms have little or no voice.


5. (SBU) The Amcham representatives uniformly stressed the
importance of a U.S. - Taiwan bilateral tax agreement. One
tax expert stated many instances of double taxation occur,
particularly when U.S. firms bank more profits in the U.S.
In this process, the Taiwan authorities refuse to permit
firms to adjust profits here, creating a double taxation
issue. She called it "not a small problem" and noted in one
recent case the amount of tax in dispute totaled about USD 4
million.

Central Bank Reserves Appropriate, Capital Outflow Won't
Continue

TAIPEI 00002284 002 OF 003


--------------
--------------

6. (C) Central Bank Deputy Governor George Chou told
Haarsager that at US $261 billion, Taiwan's foreign exchange
reserves are at the appropriate level for forex management
and other needs. Chou stated that Taiwan has no plans to
create a sovereign wealth fund, and agreed with Haarsager
that Sovereign Wealth Funds need to be as transparent as
possible in their governing structure and investment
objectives.


7. (C) Chou noted that the Central bank is keeping its eye on
inflation and capital outflows. M2, the measure of money
supply that the bank watches most closely, has so far grown
well within target rates this year. With "moderate price
pressures," however, the Central Bank increased interest
rates by an eighth of a percentage point in September. Chou
pointedly mentioned that many people believe that the bank
will increase rates again. While stressing Taiwan permitted
free flow of capital, he noted that capital outflows had been
particularly large in May - August of this year. (Note:
Published figures not yet available. End Note) The
narrowing differential between U.S. and Taiwan interest
rates, as well as improving Taiwan stock market performance
in the run up to the election, should reduce these outflows,
he stated.

Fiscal Policy
--------------

8. (C) In separate discussions of fiscal policy, both Vice
Minister of Finance Liu Teng-cheng and CIER president Hsiew
Dai-chi outlined Taiwan's efforts to make the tax system more
uniform by removing subsidies and lowering rates. This
effort is not to lower Taiwan's already low tax burden of
about 14% of GDP, but to make the system more equitable. Liu
noted that Taiwan has no plans for significant increases in
social spending. Haarsager observed that greater social
spending could translate into reduced savings and greater
domestic demand. Various interlocutors, however, indicated
that due in part to trade's sizeable share of the economy and
limited progress on liberalizing the service sector, domestic
demand is unlikely to be a significant source of growth over
the short and medium term.

Light at the End of a Long Tunnel?
--------------

9. (C) Private sector banking contacts and think tank
economists said the banking sector is hampered by
restrictions on doing business in China. Taiwan banks are
losing out to foreign competitors who are able to provide a
full range of services to customers doing business in China.
At a September 27 dinner, Fubon Bank senior executive Jesse
Ding indicated that Fubon has had limited progress in its
proposal to use the Hong Kong Monetary Authority (HKMA) as an
intermediary in using Fubon's Hong Kong subsidiary to buy a
stake in China's Xiamen City Bank. (NOTE: Ding did not go
into detail, but his comments jibe with what we have recently
heard in a separate conversation with another top Fubon
executive.) Although Ding and Taishin Financial Holding
President Keh Hsiao Lin were encouraged by the prospects of
more cross-Strait liberalization after the elections, they
were far from confident that meaningful cross-Straits banking
liberalization would occur anytime soon. Long term prospects
were extremely good, commented Lin, who predicted that within
ten years "it would all be sorted out."


10. (C) At the September 27 dinner, Taiwan Stock Exchange
(TSE) President Song-Chin Su emphasized his interest in
ensuring that the TSE improve its competitiveness by adopting
international standards, including in the area of corporate

TAIPEI 00002284 003 OF 003


governance. Taishin's Lin and Fubon's Ding were both
critical of the Chen administration's economic stewardship,
and argued strongly in favor of increased cross-Strait
economic integration. In general, authorities and private
sector contacts agreed that Taiwan's economic future lies in
removing restrictions on cross-Strait economic relations.
There was broad recognition that regardless of who wins the
March 2008 presidential election, political considerations
will slow the reform process.

Financial Sector Reform Draws Mixed Reviews
--------------

11. (C) On financial market liberalization, Finance Vice
Minister Liu noted that state-owned banks now account for
half of Taiwan's banking market, and the authorities continue
to adhere to a long-term goal of total banking sector
privatization. Liu noted that continued progress toward
privatization will be slow, due in part to lack of
Legislative Yuan (LY) approval and strong labor union
opposition. In the short term, explained Liu, the
authorities plan to sell three of the six remaining
state-owned banks. Private sector contacts were largely
pessimistic about the authorities' ability to move ahead
quickly on this "second stage" financial sector reform.
Although Taishin's Lin maintained that Taiwan has implemented
a "quiet revolution" and now has a relatively open financial
sector, Fubon's Ding, in contrast, was less sanguine,
speculating that Taiwan's relative stability during the
1997-98 Asian financial crisis may have dulled the impetus
for the more aggressive liberalization reforms adopted by
South Korea and other regional economies affected by the
crisis.


12. (C) COMMENT. The Treasury visit was useful in offering a
deeper sense of cross-Strait economic integration's impact on
the Taiwan economy, as well as a broader view of the Taiwan
policy community's efforts to address growing concerns about
Taiwan's eroding economic competitiveness. END COMMENT.


13. (U) This message has been cleared by Haarsager.
YOUNG