This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 TAIPEI 003143 
 
SIPDIS 
 
STATE PLEASE PASS AIT/W AND USTR 
 
STATE FOR EAP/RSP/TC, EAP/EP AND EB/IFD/OIA 
 
USTR FOR SCOTT KI 
 
USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER 
USDOC FOR 3132/USFCS/OIO/EAP/ADAVENPORT 
TREASURY FOR OASIA/ZELIKOW AND WISNER 
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 TW
SUBJECT: Taiwan Economic Briefing for September 2004 
 
¶1.  This cable summarizes selected recent economic events in 
Taiwan in September 2004.  Below is a brief table of 
contents: 
 
Para 2 -- Taiwan's economic expansion began to slow in the 
third quarter of 2004, but strong exports of iron, steel and 
petrochemicals will sustain healthy GDP growth and low 
unemployment. 
 
Para 3 -- Taiwan's balance of payments posted a huge surplus 
in the first half of 2004, mainly due to bank borrowing for 
purchase of production inputs. 
 
Para 4 -- Taiwan's Hsinchu Science Park agreed to cooperate 
and pursue commercial opportunities with New Mexico three 
science parks. 
 
Para 5 - Taiwan's draft regulations on packaging concern 
U.S. suppliers. 
 
Paras 6 & 7 -- Despite a decline in the first half of 2004, 
bank capital adequacy ratios remain above the Bank of 
International Settlement requirements. 
 
Slowdown in Economic Expansion 
------------------------------ 
 
¶2.  The rate of Taiwan's economic expansion started to slow 
in the third quarter, with slower export and industrial 
production growth during July-August.  Inflationary pressure 
is building as higher oil prices drive up import costs and a 
series of tropical storms drove up food prices.  In early 
October Taiwan's Central Bank of China (CBC) raised interest 
rates for the first time in four years as an anti-inflation 
measure.  Further interest rate increases could dampen the 
real estate sector and the entire economy.  Nevertheless, 
strong foreign demand for Taiwan's iron, steel, and 
petrochemicals, and expectations for semiconductor and 
liquid crystal display manufacturing to bottom out later in 
2004 give business circles optimism, prompting forecasts of 
real GDP growth above 4.5 percent and unemployment well 
below five percent for 2005.  These trends should be 
positive factors for the ruling party in the legislative 
elections later this year. 
 
Taiwan's Balance of Payments Posts Huge Surplus 
--------------------------------------------- -- 
 
¶3.  Taiwan's balance of payments (BOP) surplus in the first 
half of 2004 doubled from a year ago to US$24 billion, 
increasing Taiwan's foreign exchange (FOREX) reserves to 
US$234.6 billion.  While this sharp increase is unusual, it 
is not likely to continue, and does not presage financial 
problems.  The sharp increase is mainly due to massive bank 
borrowing to meet local corporate demand for foreign 
currency loans.  The loans are being used primarily to 
purchase production inputs for exports, and local banks own 
foreign assets roughly equal to the amounts borrowed. 
Taiwan's current account (C/A) surplus almost matched 
capital outflows of direct and portfolio investment.  The 
second half of 2004 will likely bring slower export 
expansion and reduce Taiwan's C/A surplus. 
 
Cooperation between U.S.-Taiwan Science Parks 
--------------------------------------------- 
 
¶4.  On August 26, the Deputy Director General of Taiwan's 
Hsinchu Science Park and representatives of three science 
parks in New Mexico signed a memorandum of cooperation aimed 
at encouraging the development of the smaller New Mexico 
parks and creating opportunities for commercial cooperation 
between tenants of the Hsinchu park and tenants of the New 
Mexico parks.  Senator Bingaman of New Mexico, who visited 
the Hsinchu park in December 2003, facilitated the 
agreement.  The U.S. parks hope to learn from the experience 
and success of the Hsinchu park, which was established in 
1980 and is now home to 370 high tech firms whose exports 
accounts for 30-35 percent of Taiwan's total exports. 
 
New Regulation Against "Excessive" Packaging 
-------------------------------------------- 
 
¶5.  In July, Taiwan's Environmental Protection 
Administration (TEPA) introduced a draft regulation against 
"excessive" packaging.  While TEPA claims local industry 
supports the proposed legislation, foreign industry 
representatives are strongly opposed.  AIT has persuaded 
TEPA to submit the legislation to WTO for comment, and to 
extend the time-line for finalizing the legislation.  AIT 
ESTOFF has discussed this issue with AmCham, COSTCO and ECCT 
leadership.  Based on those discussions, AmCham and ECCT 
will host a meeting with some of the more proactive industry 
reps. 
 
Taiwan Bank Health 
------------------ 
 
¶6.  Taiwan banks reported a slight decline in capital 
adequacy ratio from 10.07 percent to 10.01 percent in the 
first half of 2004, still above the eight percent minimum 
set by the Bank for International Settlements.  Central bank 
officials attributed decline in the capital adequacy to 
Taiwan banks' massive write-offs of bad debt over the past 
five years and to a significant increase in bank loans as 
the economy rapidly expanded over the past year.  Meanwhile, 
the bad debt write-off drove down Taiwan banks' average non- 
performing loan (NPL) ratio, using internationally accepted 
measures, from a double-digit level in early 2002 to below 
five percent in June 2004. 
 
¶7.  Despite the improvement, Taiwan's Financial Supervisory 
Commission (FSC) continued to strengthen supervision of the 
banking sector.  The FSC has drafted revisions to the 
Deposit Insurance Statute that will authorize the Central 
Deposit Insurance Corporation to take over any financial 
institutions with a capital adequacy ratio of under two 
percent.  The bill requires troubled financial institutions 
to pay extra insurance charges on top of normal premiums to 
further encourage banks to maintain a prudent lending policy 
and protect against insolvency. 
 
PAAL