TAIWAN: CENTRAL BANK CHIEF FORECASTS LOW

C O N F I D E N T I A L SECTION 01 OF 02 TAIPEI 000039 SIPDIS SIPDIS STATE PASS USTR USTR FOR KATZ AND STRATFORD, TREASURY FOR OASIA/TTYANG AND HAARSAGER, COMMERCE FOR 4431/ITA/MAC/AP/OPB/TAIWAN E.O. 12958: DECL: 06/21/2010 TAGS: ETRD ECON EFIN PINR TW SUBJECT: TAIWAN: CENTRAL BANK CHIEF FORECASTS LOW INFLATION AND STEADY INTEREST RATES Classified By: AIT Deputy Director Robert S. Wang for reasons 1.4 (b), (d) 1.(C) SUMMARY. During a June 14 meeting with AIT Deputy Director Robert Wang, Taiwan's Central Bank Chief PERNG Fai-nan stated that inflation would remain below 2% for 2008. He said that he was unconcerned with Taiwan's capital outflow, which he saw as a function of excess savings and a large trade surplus. He reiterated Taiwan's commitment to free capital flows and stated his support for bilateral agreements on tax and investment. End Summary. ¶2. (SBU) On January 8 AIT Deputy Director Robert Wang called on PERNG, Fai-nan, Governor of the Central Bank of the Republic of China (Taiwan). Perng is the senior official of the bank, which also has two deputy governors. Interest rates are set by the Bank's Board of Directors, which include Perng, the two deputy governors as well as the Ministers of Finance and Economic Affairs. Taiwan's central bank holds the fourth largest foreign exchange reserves in the world at over US$270 billion. Inflation Will Remain Below 2% -------------- ¶3. (C) Perng stated that although Taiwan had faced some inflation pressure from August and September typhoons (which raised food prices),prices have already returned to normal levels. Like the rest of the world, Taiwan also faces increased prices for energy, raw materials and commodities, but he expects inflation to remain below 2% in 2008. Although he refused to speculate on whether the bank will raise interest rates, he implied that he did not expect inflationary pressure to trigger a need to raise rates. No Worries over Capital Outflows or FX Rate -------------- ¶4. (C) He continued that Taiwan's real interest rates (interest rate less the rate of inflation) were not low relative to other economies in the region, noting that the real rates were far lower in Singapore, Thailand, China and many other countries. Nor did he believe that low interest rates were the cause of capital outflow. (Note: capital outflow reached US$32 billion in the first three quarters of 2007.) Taiwan's capital outflow is a natural cause of Taiwan's enormous trade surplus coupled with "excess savings." He stated that this level of capital outflow, which stems largely from DOMESTIC sources seeking investment overseas, is nothing to be concerned about and signaled Taiwan's free capital flows regime. The capital outflows balancing the trade surplus have kept the value of the New Taiwan Dollar relatively steady against the US Dollar. While stating that the central bank would try to stabilize the exchange rate from dramatic volatility, Peng said it would in no way interfere in the rate set by market forces. Supports Agreements on Investment and Tax -------------- ¶5. (C) Governor Perng expressed his support for bilateral agreements on investment and tax. Noting that the bank did not have a leading role in either set of discussions, he stated that he would make clear his support to other agency heads. Perng noted that the Finance Minister, who has the lead on the tax discussion, is fully behind the proposed agreement. He acknowledged that the Financial Supervisory Commission has some concerns on information sharing, but understood the FSC also supports an agreement. Regarding bilateral investment discussions, the bank has sent a representative to these discussions and stands ready to provide any information that would be useful. Biographical Note -------------- TAIPEI 00000039 002 OF 002 ¶6. (SBU) PERNG Fai-nan is the longest-serving cabinet-level official in the current government. He is approaching the end of his second 5-year term, first appointed by then President Lee Teng-hui in 1998. His relatively advanced age (69) makes it less likely that he will be reappointed to a new term of office this year, but he is seen as an independent and has earned the respect of both sides of the political spectrum. Perng joined the Central Bank in 1971, working most of his career in the bank's department of economic research. He has also served as chairman of two state-owned banks - the International Commercial Bank of China as well as the Central Trust of China in the mid 1990s. In 1962 he received a B.A. in Economics from National Chung Hsin University. He earned an M.A. in Economics from the University of Minnesota in ¶1971. Perng was born in Hsinchu, Taiwan, on January 2, 1939. He participated in a U.S. International Visitor Program in 1989 and speaks excellent English. YOUNG