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### Viewing cable 06TAIPEI3051, Taiwan Economy: Sunny With Polychrome Clouds

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
06TAIPEI3051 | 2006-09-06 06:21 | 2011-08-23 00:00 | UNCLASSIFIED | American Institute Taiwan, Taipei

`

    VZCZCXRO1962
    RR RUEHGH
    DE RUEHIN #3051/01 2490621
    ZNR UUUUU ZZH
    R 060621Z SEP 06
    FM AIT TAIPEI
    TO RUEHC/SECSTATE WASHDC 1953
    INFO RUCPDOC/USDOC WASHDC
    RUEHBK/AMEMBASSY BANGKOK 3394
    RUEHBJ/AMEMBASSY BEIJING 5621
    RUEHUL/AMEMBASSY SEOUL 8068
    RUEHGP/AMEMBASSY SINGAPORE 6592
    RUEHKO/AMEMBASSY TOKYO 7997
    RUEHML/AMEMBASSY MANILA 9791
    RUEHJA/AMEMBASSY JAKARTA 3915
    RUEHKL/AMEMBASSY KUALA LUMPUR 3554
    RUEHHI/AMEMBASSY HANOI 3121
    RUEHBY/AMEMBASSY CANBERRA 4301
    RUEHWL/AMEMBASSY WELLINGTON 1549
    RUEHHK/AMCONSUL HONG KONG 6828
    RUEHGH/AMCONSUL SHANGHAI 0354
    RUEHGZ/AMCONSUL GUANGZHOU 9532
    RUEHRC/USDA FAS WASHDC 2560
    RHMFIUU/DEPT OF ENERGY WASHINGTON DC
    RUEATRS/DEPT OF TREASURY WASHDC

` `

    UNCLAS SECTION 01 OF 05 TAIPEI 003051

    SIPDIS

    SIPDIS, SENSITIVE BUT UNCLASSIFIED

    STATE PLEASE PASS AIT/W AND USTR
    STATE FOR EAP/TC, EAP/EP
    DOE FOR EIA/OOG/KVAGTS
    FAS FOR ITP/ADD/SHIEKH, MIRELES, AND SMITHUS
    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: Taiwan Economy: Sunny With Polychrome Clouds

    Ref: (A) Taipei 2695

    (B) Taipei 2574
    (C) Taipei 1549
    (D) 05 Taipei 4647

    SUMMARY
    -------

    ¶1.  (SBU) Summary:  Local think tanks forecast rising exports will
    keep Taiwan's economic growth rate at around 4% in 2006 and 2007 and
    bring Taiwan's unemployment rate below the current 3.9%.  Private
    consumption and investment (75% of GDP) are recovering from high
    card debt and inventories, and net capital outflows mitigate excess
    liquidity in Taiwan.  This sunny forecast contrasts sharply with
    media reports and widespread perceptions of gloomy economic
    prospects.  End summary.

    Taiwan Media Reports Paint Bleak Picture
    ----------------------------------------

    ¶2.  (SBU) The Taiwan media seems to thrive on doom and gloom stories
    of unemployment, suicide, crime, and corruption.  Articles on
    economic issues commonly include data presented to make Taiwan's
    economic situation appear bleak.  Recent articles, even in
    economic-focus newspapers, have reported that foreign investment is
    continually declining, that Taiwan families are worse off than five
    years ago, and that Taiwan's level of unemployment and poverty
    threaten its social stability, etc.  Most economists looking at
    Taiwan's economy, along with its crowded restaurants, stores, and
    streets would not draw these conclusions.

    Forecasts by Four Major Think Tanks
    -----------------------------------

    ¶3.  (U) During July and August four major Taiwan think tanks
    published updated economic forecasts for 2006, and two released 2007
    forecasts.  The Directorate General of Budget, Accounting and
    Statistics (DGBAS), Taiwan's official statistics agency, predicted
    on August 18 that economic growth will increase from 4% in 2005 to
    4.3% in 2006 and will remain above 4% in 2007.  The independent
    think tanks Chunghua Institution for Economic Research (CIER),
    Taiwan Institute of Economic Research (TIER), and Academia Sinica
    produced similar estimates with economic growth for 2006 and 2007
    projected at around 4%.

    Exports Drive Economic Growth
    -----------------------------

    ¶4.  (U) Taiwan Customs data show y-o-y export growth increased from
    8.8% in 2005 to 14% in the first seven months of 2006, with the
    monthly growth rate accelerating from 10% in May to 16.5% in June
    and 21% in July.  Growth in export orders in Q2, the basis for
    actual shipments in Q3, increased to 21.6% from 21.2% in Q1 of 2006,
    both higher than 15.1% in Q2 of 2005.  The four Taiwan think tanks
    believe that export expansion will continue to propel Taiwan's
    economic growth in 2006 and 2007, despite the dampening effects on
    foreign demand of higher interest rates and higher energy costs.
    Taiwan relies heavily on export-led growth from exports to China
    (including Hong Kong), which takes more of Taiwan's exports than the
    United States, Japan, and the EU combined.  This provides some
    insulation to Taiwan from the widely anticipated slowing demand in
    developed markets.

    TAIPEI 00003051  002 OF 005

    Relocation to China Boosts Taiwan's Economy
    -------------------------------------------

    ¶5.  (U) Taiwan's political parties, media and economic actors have
    been endlessly debating whether or not industrial relocation to
    China will "hollow out" the economy.  However, statistics clearly
    show that relocation to China is a major contributor to Taiwan's
    export expansion and has enabled firms to increase sales to
    developed markets.  Taiwan production bases in China import inputs
    from Taiwan, including machinery, equipment, components, and
    semi-finished goods.  Taiwan's exports to China (including Hong
    Kong) have grown faster than its exports to other markets,
    increasing as a percent of total exports from below 20% prior to
    2000 to nearly 40% in July 2006.

    ... Trade Surplus,
    ------------------

    ¶6.  (U) According to Taiwan Customs data, the trade surplus with
    China in 2005 reached US$50 billion; double its 2001 level of US$24
    billion, and grew another 17%, to US$34.7 billion, in the first
    seven months of 2006.  Since the year 2000, Taiwan's trade surplus
    with China has totaled US$221.7 billion, far more than its global
    trade surplus of US$7.4 billion over the same period.  Trade with
    China is the main source of Taiwan's huge and growing trade
    surpluses.

    ... Increased ForEx Reserves,
    -----------------------------

    ¶7.  (U) Industrial relocation requires investments to flow from
    Taiwan to China, but also creates inflows of capital in the form of
    trade surpluses.  Trade surpluses have increased Taiwan's forex
    reserves and money supply (liquidity).  Taiwan's trade surplus with
    China since 2000 dwarfs Taiwan's cumulative direct investment in
    China (US$51 billion according to official statistics or US$70-100
    billion, according to private estimates).  The US$221.7 billion
    cumulative trade surplus with China since 2000 has contributed to
    boosting Taiwan's forex reserves by US$153.6 billion, to US$260.4
    billion, over the same period.

    ... And Increased Employment
    ----------------------------

    ¶8.  (U) Taiwan's unemployment rate declined to below 4% in November
    of 2005 from a historical high of 5.3% in August 2001.  A recent
    commentary in the Economic Daily News (EDN) explained that exports
    to China over the past six year have created 810,000 jobs, far more
    than the number of layoffs due to industrial relocation.  The
    unemployment rate fell to 3.78% in April, and has remained below 4%
    since then.

    Economic Evolution Towards Increased Value-Added
    --------------------------------------------- ---

    ¶9.  (U) Taiwan firms are still expanding high technology
    manufacturing in Taiwan.  The excess inventory that contributed to
    reduced private investment in H2 of 2005 has been largely
    eliminated.  Imports of capital goods (for production) grew y-o-y at
    a rate of 6.3% in June and 15% in July.  New semiconductor and flat
    panel projects have turned Taiwan into the world's largest buyer of

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    Applied Materials' high tech production equipment; outpacing Japan
    and South Korea.

    Increased Foreign Investment
    ----------------------------

    ¶10.  (U) Approved foreign investment (FDI) in Taiwan in the first
    seven months of 2006 totaled US$8.3 billion, nearly five times the
    level in 2005, and approved FDI in electronic industries surged to
    US$4.4 billion, 16 times the level a year ago.  Taiwan's
    accomplishments in financial consolidation and strong consumer
    purchasing power attract foreign investment into its financial and
    commercial sectors.  Approved FDI in Taiwan's financial sector in
    the first seven months of this year totaled US$2.2 billion, nine
    times the same period of 2005.  Meanwhile, approved FDI in
    wholesale/retail firms surged 63% to US$454 million.  Financial
    institutions and wholesale/retail firms contributed 40% of GDP in H1
    of 2006, up from 33% ten years ago.  Despite a 0.2% decline in
    domestic private investment, approved FDI increased in 2005 by 7%.

    ¶11.  (U) Foreign investment in Taiwan financial institutions in the
    first few months of 2006 includes:

    --GE Consumer Finance (Cosmos Bank) NT$2.75 billion;
    --Newbridge Asia (Taishin Financial Holdings) NT$27 billion;
    --Normura Securities (Taishin Financial Holdings) NT$4 billion;
    --AIG (Central (Non-life) Insurance with NT$6 billion;
    --Citicorp (Fubon, partially withdrawn);
    --Prudential Life (E. Sun Bank);
    --New York Life (Bank of Overseas Chinese);
    --Temasek Holding (E. Sun Financial Holdings);
    --BNP Paribas (Cooperative Bank of Taiwan);
    --Shinsei Bank (Jihsun International Commercial Bank);
    --Newbridge (Kuo Hua Life);

    Consumption Recovers from Card Debt
    -----------------------------------

    ¶11.  (U) A sharp increase in delinquent credit/cash card debt
    earlier this year prompted banks to temporarily tighten lending to
    consumers, dampening private consumption growth to 1.4% in Q2 of
    2006 from 3% a year earlier (refs B&C).  However, this problem has
    been effectively addressed through debt rescheduling and debt
    write-offs.  Several private banks recently again launched credit
    card promotion campaigns.  DGBAS forecasts private consumption will
    grow 2.2% in Q4 this year and 2.9% in 2007 while CIER predicts 2007
    growth will exceed 3%.  Both predictions are higher than the average
    annual growth of 2.5% over the past four years.

    Capital Outflow Lessens Liquidity
    ---------------------------------

    ¶12.  (U) Like Japan, Taiwan has seen excess liquidity build up as a
    result of export sales to and through production bases in China, and
    to a lesser extend from export sales to developed markets.  Taiwan's
    Central Bank of China (CBC) has tried to absorb the excess liquidity
    by issuing negotiable certificates of deposits (NCD).  Outstanding
    NCD and savings deposits re-deposited by CBC total NT$5.1 trillion
    (US$156 billion), an amount equivalent to the total of currency in
    circulation and deposit money.  CBC recently began permitting
    secured NT dollar (NTD) bank loans to be designated as foreign

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    direct investment (FDI) in Taiwan as an additional way to absorb
    excess liquidity (ref A).

    Excess Liquidity Leads to Capital Outflow
    -----------------------------------------

    ¶13.  (U) Excess liquidity depresses interest rates and widens the
    difference between interest rates in Taiwan and the United States.
    Higher U.S. interest rates along with Taiwan tax exemptions for
    overseas earnings encourage capital outflow.  Although CBC has
    raised interest rates eight times over the past two years, Taiwan
    rates remain 2.9 percentage points lower than U.S. rates.  Higher
    interest rates abroad encourage firms to invest overseas.  Net
    outbound investment in H1 of 2006 totaled US$15 billion, mitigating
    Taiwan's excess liquidity problem.

    Other Urban Legends
    -------------------

    ¶14.  (U) Some of the other "common knowledge" about Taiwan's
    economic situation that is less than true includes:

    -- Reports of a 30% drop in auto sales: While overall auto sales in
    H1 fell by 4.6%, sales of luxury cars, motorscooters and motorcycles
    increased; Mercedes Benz and Lexus sales increased by over 20%
    during this period.  Overall passenger car sales through the end of
    July were up 2.1% y-o-y.

    -- Declining real estate prices: Residential house prices in Q2 this
    year registered a 12th consecutive quarterly rise according to an
    index compiled by industry and academics.  In Taichung, the average
    price of high-rise housing units has increased by 47% since 2003.
    Overall housing prices increased by 20-30% in this period.

    -- Declining consumption: Y-o-Y wholesale and retail sales growth
    increased from 5% in Q1 to 6.9% in April, 7.8% in May, and 9.2% in
    June.  Taiwan hotels reported 4.5% revenue growth in H1.  The Sogo
    department store's reported decline in sales this year follows a
    consumer shift towards other types of retailers, as happened in
    Japan.

    -- Growing income gap: In fact, the income ratio of the wealthiest
    quintile to the poorest quintile was lower in 2004 and 2005 than it
    was in 2002 and 2003.  Taiwan's income disparity is still one of the
    lowest in the world, second in Asia to Japan.

    -- Declining disposable income: According to DGBAS statistics,
    disposable income has gone up every year since 2001.  Disposable
    income in 2005 exceeded the high set in 2000 on both a household and
    per capita basis.

    -- Domestic investment less than outbound investment:  Much of
    recent FDI has been channeled into high-tech manufacturing and
    financial sector consolidation, while outbound FDI is mainly low
    tech manufacturing in search of lower production costs.

    -- Business criticism: While there are widespread complaints about
    current economic policies there are few practical alternatives
    suggested.  Taiwan's Commercial Times printed two commentaries by
    "business leaders" in the past week criticizing current economic
    policies, but failed to note that the authors had been indicted in
    Taiwan on financial crimes and subsequently fled to China.  The

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    commentaries lauded the superior PRC "understanding" of the needs of
    Taiwan businesses, without mention of the vastly different political
    contexts.

    Clouds are Mainly Political
    ---------------------------

    ¶15.  (SBU) Ongoing corruption scandals, campaigns to unseat the
    President, the Doha Round suspension, and failed initiatives on
    cross-Strait relations have deepened the pessimism of many local
    pundits.  A Legislator recently told AIT that hopes for a
    cross-Strait agreement on banking supervision were dashed by the
    political chill caused by Chad's switching diplomatic recognition,
    and that pending regional and bilateral trade agreements were bad
    news for Taiwan's economy since Taiwan was excluded from these
    arrangements.  She warned Taiwan may see major firms de-listing from
    the Taiwan stock exchange.  An AmCham executive recently responded
    to the positive economic statistics by noting that Taiwan's economy
    could and should be doing much better.  The think tank predictions
    of good economic prospects conflict sharply with the widespread
    pessimism in both public and business perceptions.  The economic
    numbers look good.  The clouds on the horizon are tinged with shades
    of the green, blue, orange, purple (tax reform) and red (dump Chen)
    of Taiwan political factions.

    Young

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