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

012256Z Nov 05

UNCLAS SECTION 01 OF 03 TAIPEI 004418 
 
SIPDIS 
 
 
STATE PLEASE PASS AIT/W AND USTR 
 
STATE FOR EAP/RSP/TC, EAP/EP 
 
USTR FOR WINTER AND WINELAND 
 
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:  Economic Briefing for October 2005 
REF: 
 
¶1.  This cable summarizes selected recent economic events in 
Taiwan in October 2005: 
 
--Economic performance in Q3 
--Office Space 
--Capital outflow weakens NT Dollar 
--Renminbi exchange liberalization 
--PRC Tourists in Taiwan 
--Semiconductor facility utilization 
--Taiwan students consider China 
--Hong Kong-Taichung charter flights 
--ECCT Criticism 
--Hurricane Katrina reconstruction 
 
Taiwan Economic Performance Improves 
------------------------------------ 
 
¶2.  Although production and trade growth remained at single- 
digit levels, Taiwan has seen solid signs of improvement in 
economic performance in Q3 this year.  A decline in 
inventories in advanced-country markets and weaker NT dollar 
has contributed to a steady rise in Taiwan's export growth 
from 3.1% in June to 8.5% in September.  Local economists 
expect the growth in exports will continue as the U.S. 
Government implements a US$200 billion hurricane damage 
reconstruction program (see Para 12).  Taiwan's 
manufacturing sector has gone from negative growth of 1% in 
Q1 to a 12-month high of 6.4% in September 2005.  Foreign 
investment in Q3 shot up 53.6% from a year ago, a sharp 
contrast to the negative figures in Q1 and Q2.  Higher oil 
prices, coupled with storm damage to vegetable and fruit 
farms this summer, pushed up the inflation rate to a nine- 
year high of 3.6% in August (it declined to 3.1% in 
September.)  In late October, the Chunghua Institution for 
Economic Research forecast Taiwan's 2005 quarterly growth 
would rise from 2.5% in Q1 and 3% in Q2 to 4.1% in Q3 and 
4.4% in Q4.  It predicts that 2005 real GDP will grow at 
3.5%. 
 
Grade A Real Estate 
------------------- 
 
¶3.  The Taipei 101 Tower (the world's tallest building) and 
the Uni-President HQ Building both became available for 
occupancy in the second quarter of 2005 causing the vacancy 
rate of Taipei Grade A office space to jump from a little 
over 5% to almost 19%.  Rents, which had risen in the three 
previous quarters, fell slightly in the third quarter. 
 
Capital Outflow Weakens NTD 
--------------------------- 
 
¶4.  Taiwan's foreign exchange market has experienced huge 
fluctuations over the past year.  Capital inflows from July 
2004 to March 2005 caused the NT Dollar (NTD) to gain 10% 
against the US dollar (USD).  However, from July through 
October this year large capital outflows have weakened the 
NTD by 9.35%.  The inflows late last year and early this 
year were partially due to Morgan Stanley Capital 
International increasing Taiwan's weight in its stock price 
index and partially due to expectations for greater renminbi 
(RMB) appreciation (because most Taiwan investment is 
located in China.)  The NTD went from NT$34.2 per USD in 
July 2004 to a five-year high of NT$30.8 per USD in March 
¶2005. 
¶5.  The PRC permitted the RMB to appreciate only 2% in July 
this year, far less than the 10% predicted by many in the 
business community.  Speculative capital flowed out of 
Taiwan after the failure to gain from a more significant RMB 
appreciation.  Some foreign portfolio investors also 
withdrew investment funds in reaction to Taiwan's political 
stalemate and corruption scandals.  Taiwan's stock price 
index declined 10% from July to October, and the NTD 
depreciated to 33.7 per USD at the end of October 27. 
 
RMB Exchange - Further Liberalization? 
-------------------------------------- 
 
¶6.  Taiwan's RMB-NTD direct currency exchange pilot program 
on the offshore islands of Kinmen and Matsu saw RMB 1.7 
million exchanged from October 3 to 20.  People First Party 
Legislator Christina Liu has introduced a bill that would 
remove the requirement for a bilateral exchange settlement 
agreement and require only an exchange settlement mechanism 
as a prerequisite for allowing direct RMB-NTD currency 
exchange throughout Taiwan.  The bill is currently under 
review in the Legislative Yuan. 
 
PRC Tourism Up for "Golden Week" 
-------------------------------- 
 
¶7.  The Travel Agent Association of Taiwan (TAAT) told AIT 
that during September 28 - October 2 National Day holiday in 
China ("Golden Week") approximately 3,000 PRC tourists 
visited Taiwan.  This was more than twice the number of 
visits in the entire month of October last year.  TAAT 
estimated that each tourist spent an average of around USD 
5,000 to visit Taiwan and that Taiwan businesses took in an 
additional NT$300 million (about US$9 million) as a result. 
Taiwan currently permits only PRC nationals who are living 
or traveling abroad to visit Taiwan for tourism. 
 
Semiconductor Capacity Utilization 
---------------------------------- 
 
¶8.  Taiwan Semiconductor Manufacturing Company (TSMC) 
announced that its capacity utilization rate increased from 
78% in the first quarter to 96% in the third quarter.  The 
firm predicts that utilization will rise further to over 
100% in the fourth quarter.  (Semiconductor manufacturing 
firms base capacity utilization rates on the standard 
specifications for manufacturing equipment.  With modified 
equipment, capacity utilization rates can exceed 100%.) 
United Microelectronics Company (UMC), TSMC's main rival, 
reported that its capacity utilization rate increased from 
63% in the first quarter to 78% in the third and should hit 
85% in the fourth.  TSMC and UMC are the world's two largest 
contract semiconductor manufacturers. 
 
Taiwan Students Look West 
------------------------- 
 
¶9.  According to a survey published by Taiwan's Career Media 
magazine, the PRC has surpassed the United Kingdom to become 
Taiwan students' second favorite destination for graduate 
studies after the United States.  The survey indicated that 
the main reason Taiwan students are interested in studying 
in China is because they believe a degree from a PRC 
institution will help them get a job there.  The magazine 
reports that there are approximately 10,000 Taiwan students 
in China's graduate and undergraduate programs.  According 
to the survey, 60% of Taiwan undergraduates are willing to 
work in the PRC. 
 
More Hong Kong-Taichung Charter Flights 
--------------------------------------- 
 
¶10. Taichung Mayor Jason Hu visited Hong Kong October 14 
urging Hong Kong authorities to resume charter flight 
service to Taichung.  Hong Kong authorities approved an 
application from Taiwan's Mandarin Airlines on October 18 to 
conduct two round-trip charter flights on October 20 and 23. 
Even with such short notice, Mandarin Airlines was able to 
fly October 20 with a passenger load of 80% of capacity. 
UNI Airways Corp. was later approved for a Taichung-Hong 
Kong flight on October 27 and a Hong Kong-Taichung flight on 
October 29. 
 
ECCT Has Harsh Criticism for Taiwan 
----------------------------------- 
 
¶11.  The European Chamber of Commerce in Taipei (ECCT) 
released its 2005-2006 Position Papers at a press conference 
on October 26.  The Position Paper warns that Taiwan is 
losing business competitiveness relative to other East Asian 
economies and cites four key areas where change is needed: 
1) over-regulation, 2) slow cross-Strait commercial 
normalization, 3) WTO non-compliance, 4) slow services 
upgrade.  Taiwan's Council for Economic Planning and 
Development has promised to hold meetings to discuss the 
ECCT proposals. 
 
Hurricane Katrina Reconstruction Benefits Taiwan 
--------------------------------------------- --- 
 
¶12.  The U.S. is implementing a US$200 billion 
reconstruction program for three southern states that 
sustained heavy damage from Hurricane Katrina.  The program 
has started to benefit Taiwan's export sector, particularly 
for furniture, fixtures, pipes & tubes, power tools, hand 
tools, and auto parts.  For a number of Taiwan companies, 
export orders received in September and October shot up by 
90% from a year ago.  September 2005 sales of Chen Lin, a 
major faucet supplier, nearly doubled to NT$400 million 
(US$11.9 million).  Taiwan suppliers expect that export 
orders from and sales in the three southern states will 
continue to increase through early next year. 
 
PAAL