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 002365 
 
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 Stimulus & New Bank Branches 
 
Ref:  Taipei 2289 
 
SUMMARY 
------- 
 
¶1.  Immediately following the release of weak economic data 
for the first quarter of 2005 (reftel), Premier Frank Hsieh 
announced a program to increase funding for home buyers and 
small & medium enterprises by NT$600 billion.  Some NT$400 
billion of the support comes from government agencies. 
However an additional NT$200 billion in bank loans is to 
come from the banking system.  In a move that may blur the 
distinction between regulators and government programs, the 
Financial Supervisory Commission will reward banks that 
increase loans to SMEs by approving a limited expansion of 
their branch network.  END SUMMARY. 
 
Economic Stimulus 
----------------- 
 
¶2.  The Directorate General of Budget, Accounting and 
Statistics recently lowered its projections for Taiwan's 
real growth in 2005.  In February, it was projecting real 
GDP growth for the year would be 4.21%, but now it is 
calling for growth of 3.63%.  Shortly after this new lower 
growth outlook and the additional release of weak economic 
data for the first quarter of 2005 (reftel), Premier Frank 
Hsieh announced a program to increase funding for home 
buyers and businesses by NT$600 billion.  Hong Jui-bing, 
Director General of the Council for Economic Planning and 
Development's Economic Research Department, expected that 
these programs could push up the island's real GDP growth by 
0.5-0.6 percentage points and increase employment by 240,000 
persons. 
 
¶3.  The additional funding is divided into three areas: 
 
-- NT$100 billion in loan guarantees for small & medium 
enterprises (SME); 
 
-- NT$200 billion in bank loans for SME; and 
 
-- NT$300 billion for a low-interest housing loan program. 
The additional loan guarantees will be provided through the 
Credit Guaranty Program administered by the Ministry of 
Economic Affairs.  The additional funding for the housing 
loans will be in the form of an interest rate subsidy of 
0.125 percent provided through government grants to housing 
loan borrowers.  This last measure is likely in response to 
2004 data reporting that unsold primary housing units in 
northern Taiwan have reached a four-year high of 32,000 
units with a value of some NT$251 billion. 
 
No Government Funds for New Bank Loans 
-------------------------------------- 
 
¶4.  The additional bank loans will not come from the 
government.  Instead, the proposal depends on the FSC to 
administer an incentive scheme to encourage the banking 
system to increase loans to SMEs.  On May 23, FSC announced 
a three-year incentive program based on an opportunity for 
banks to "earn" new branches.  For the past two-plus years, 
financial officials have enforced a policy of not allowing 
banks to increase their branches.  Faced with a financial 
sector widely viewed as "overbanked," Taiwan's policy has 
been that banks can only acquire new branches through merger 
and acquisition of existing banks.  The May 23 incentive 
scheme modifies the existing policy, raising the possibility 
that banks may feel less pressure to merge. 
 
¶5.  According to the FSC's program, to be implemented in 
July 2005, the branching incentive will be available to the 
eight banks posting the largest amount of new loans to SMEs. 
The top one will be allowed to upgrade offices from the 
status of limited-function offices to full operating 
branches.  The bank with the second-largest increase will be 
permitted to upgrade two offices to branches.  The bank with 
the third best increase will be allowed to upgrade a single 
office.  For the rest of the five best-performing banks, 
each will be authorized to merge two offices into one 
branch.  These eight banks will be able to move their new 
branches to any location outside of the cities and counties 
of Taipei and Kaohsiung (where banking offices are 
considered overcrowded.) 
 
¶6.  In addition, FSC will allow limited-function offices to 
extend loans to SMEs, a kind of corporate lending currently 
only authorized to full branches.  Limited-function offices 
are currently permitted to accept deposits and trust funds, 
offer consumer loans, advance cash to credit card holders, 
sell traveler's checks, and provide services in domestic 
remittance and foreign currency exchange. 
 
COMMENT 
------- 
 
¶7.  (SBU) Taiwan's financial regulator is taking on a new 
role in promoting government lending policies.  This 
incentive program runs the risk of blurring the lines 
between the regulator and government programs.  In addition, 
loosening the restrictions on bank branches may weaken the 
incentive for banks to actively pursue mergers and 
acquisitions.  End Comment. 
PAAL