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UNCLAS SECTION 01 OF 04 TAIPEI 000010 
 
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 ESTH
SUBJECT:  Economic Briefing for December 2005 
 
¶1.  This cable summarizes selected recent economic events in 
Taiwan in December 2005: 
 
-- Macro Economic Performance 
-- Taiwan-China Integration 
-- Taiwan Banks 
-- New Tax 
-- Finance Reform 
-- Plan to Attract Investment 
-- High-speed Rail 
-- Scientific Cooperation 
-- Avian Influenza 
 
Macro Economic Performance 
-------------------------- 
 
¶2.  Taiwan's economy in the second half of 2005 rebounded 
from the impact of higher oil prices and higher interest 
rates that had dampened consumer demand in the United 
States, Japan, and Europe earlier this year.  Y-o-y growth 
in Taiwan exports accelerated from below 5% in May and June 
this year to an average of 14% in October and November. 
Manufacturing production went from a 1% contraction in Q1 to 
y-o-y growth of 4% in Q3, 8% in October, and 10% in 
November.  The service sector, accounting for 73% of 
Taiwan's total GDP, continued to expand in the second half 
of this year.  On the other hand, agriculture, accounting 
for less than 2% of GDP, experienced further contraction 
this year due to bad weather and inability to compete with 
imported products.  The unemployment rate in November 
declined to 3.9%, the lowest since April 2001.  The consumer 
price index in November fell to 2.47%, down from a 7-year 
high of 3.58% in August. 
 
¶3.  Both government and private think tanks predict Taiwan's 
economic growth in 2006 will be at or above 4%, based on 
expectations that developed nations will stimulate private 
consumption, and thus increase demand for Taiwan's exports. 
Growth in private investment in Taiwan in 2006 is expected 
to remain below 5% due to over-expansion in 2004.  The 
Academia Sinica is concerned that the alternative minimum 
tax, due to start January 2006, will dampen private 
consumption and investment.  Nevertheless, the Council for 
Economic Planning and Development, Taiwan's official 
economic planning agency, predicts real GDP growth of 4.5% 
in 2006 (predictions from other institutions include 3.3% by 
Global Insight, 4.1% by the World Bank and Asian Development 
Bank, 4.3% by the International Monetary Fund, 4% by Taiwan 
Institute of Economic Research and Chunghua Institution for 
Economic Research, 4.1% by the Directorate General of 
Budget, Accounting and Statistics (DGBAS), and 4.25% by 
Academia Sinica).  The DGBAS, Taiwan's official statistical 
agency, predicts per capita GNP will reach US$15,623 in 
¶2006. 
 
China Replaces USA as 2nd Major Source of Imports 
--------------------------------------------- ---- 
 
¶4.  Taiwan's rapidly growing economic integration with China 
has led to China surpassing the United States as Taiwan's 
second major source of imports.  In September 2005 Taiwan's 
imports from China totaled US$1,643 million, for the first 
time exceeding the US$1,569 million of imports from the 
United States.  The gap broadened in October to US$1,774.3 
million from China versus US$1,689.7 million from the United 
States.  (Cross-strait trade statistics from the Bureau of 
Foreign Trade are currently available only through October 
2005.)  Taiwan's total imports have grown by double-digit 
rates over the past four years while imports from the United 
States have experienced a y-o-y decline for the past six 
months.  China replaced the United States as Taiwan's major 
export destination in 2002.  The percentage share of exports 
to China has steadily increased from 19.6% in 2001 to 28% in 
September 2005.  Meanwhile, the share of exports to the 
United States steadily fell from 22.5% to 14%.  The gap will 
continue to broaden as Taiwan manufacturing firms increase 
production in China. 
 
Improvement in Taiwan Banks 
--------------------------- 
 
¶5.  Taiwan banks significantly improved their financial 
standing in November 2005.  Efforts to write-off bad debt 
and sell problem assets contributed to a decline of NT$29.3 
billion in non-performing loans (NPL) in November to 
NT$425.8 billion, 36% below a year ago.  Average NPL ratios 
in November dropped to 2.61%, down from nearly 12% in March 
2002, 4.35% in November 2004 and 2.81% in October 2005.  The 
number of local banks reporting NPL ratios above the 5% 
limit set by the Financial Supervisory Commission (FSC) in 
November 2005 fell to five from 29 a year earlier, and among 
the five, only three reported capital adequacy ratios below 
the FSC minimum requirement of 8%.  One of the three 
(Business Bank of Hualien, BBH) was sold to Nassau Inn for 
NT$1,000 million (US$30 million) on November 28.  Nausau is 
expected to improve and sell BBH rather than to hold and 
manage it. 
 
¶6. In November 2005, seven of the nine remaining state- 
controlled banks reported declines in NPL ratios.  The 
exceptions were Bank of Taiwan's NPL ratio in November 
increased to 1.61% from 1.53% in October, and Huanan 
Commercial Bank's remained unchanged at 1.80%.  Changhwa 
Commercial Bank wrote off NT$32.1 billion of bad debt in 
November, resulting in a drastic drop in its NPL ratio from 
5.36% in October to 1.76% in November.  Taishin Financial 
Holding replaced the Ministry of Finance to become the 
largest shareholder in September 2005.  The November NPL 
ratios of the four other state-controlled banks together 
with their October figures in parentheses are as follows: 
--Land Bank of Taiwan: 3.34 (3.44%) 
--Cooperative Bank of Taiwan: 3.21% (3.33%) 
--Huanan Commercial Bank: 2.27% (2.31%) 
--Business Bank of Taiwan: 4.57% (4.60%) 
 
Legislation of Alternative Minimum Tax 
-------------------------------------- 
 
¶7.  On December 9, Taiwan passed a tax reform bill 
establishing an alternative minimum tax mechanism (AMT), 
Taiwan's first new tax in 20 years.  The AMT will affect 
only businesses with annual income above NT$2 million and 
individuals with annual income above NT$6 million.  The AMT 
tax rate will be 20% for individuals and 10 - 12% for 
businesses.  The AMT will affect only about 0.3% of 
individual taxpayers and 0.9% of business firms, but will 
have a disproportionate impact on high-tech industries 
because of the tax exemptions they currently enjoy. 
Business leaders warn that the AMT may prompt further 
industrial relocation offshore and emigration of high-income 
people.  The tax has broad popular support.  Senior 
executives from some of Taiwan's leading information 
technology (IT) companies have publicly supported expanding 
taxation to high-tech firms.  They believe that Taiwan's 
industry is well able to absorb what they perceive to be a 
fairly modest tax increase. 
 
Progress in Second Stage of Finance Reform 
------------------------------------------ 
 
¶8.  In spite of strong resistance from labor unions and 
opposition legislators, Taiwan has accomplished two of the 
three goals for 2005 set in its second stage of financial 
reform.  The goal not attained was that of selling 
controlling interest in a state-owned bank to foreign 
investors.  Nevertheless, the MOF sold 22.5% of equity in 
Changhwa Commercial Bank to Taishin Financial Holding in 
July 2005. The Taiwan Development and Trust Company 
retreated from the banking sector in January 2005 by selling 
its banking department to Jihsun International Commercial 
Bank.  The MOF merged seven state-owned banks into three in 
Q4 2005, reducing the number of state-owned banks to six 
(i.e., Bank of Taiwan (BOT), Mega Commercial Bank (MCB), 
Cooperative Bank of Taiwan (CBT), Land Bank of Taiwan, First 
Commercial Bank, and Huanan Commercial Bank).  The three 
merger cases are as follows: 
 
-- On November 8, Cooperative Bank of Taiwan (CBT) announced 
its merger with Farmers Bank of China (FBC).  The merger of 
these two banks will make CBT the third largest bank with a 
market share of 10% in assets. 
 
-- On November 17, Bank of Taiwan (BOT) announced it would 
take over the banking department of the Central Trust of 
China.  This acquisition will increase the BOT's market 
share to 11.59% in assets, the largest among local banks. 
 
-- In October, the Mega Financial Holding Company (MFHC) 
decided to merge its two subsidiary banks (i.e., 
International Commercial Bank of China and Chiao Tung Bank) 
into Mega Commercial Bank (MCB) in March 2006.  The MFHC 
announced on December 16 it had acquired 26% equity in 
Business Bank of Taiwan (BBT) and will merge BBT into MCB 
over the next three years.  The merger will make MCB the 
second largest bank with market share of 10.89% in assets. 
 
EY Revitalization Plan to Attract Investment 
-------------------------------------------- 
 
¶9.  On November 28, 2005, Taiwan's Executive Yuan (EY) 
announced six measures to encourage "traditional" 
industries (non-high-tech) to invest in Taiwan.  The 
measures target Taiwan firms that have invested in 
China.  The EY hopes these measures will boost 
investment in Taiwan by NTD 137 billion (about USD 4 
billion).  The measures include funding for subsidized 
rents in industrial parks, expansion of existing 
industrial parks, low-interest financing for investors, 
converting two industrial parks into free trade zones, 
and permitting additional employment of foreign workers 
by firms in labor-intensive industries.  Some observers 
have pointed out that the new alternative minimum tax 
(see para 7) will counteract some of the benefits that 
these six measures are intended to create. 
MOTC Considering Buying High-Speed Rail 
--------------------------------------- 
 
¶10.  On December 26, the Ministry of Transportation and 
Communications (MOTC) Minister Lin Ling-san confirmed 
that the Taiwan government was considering buying the 
build-operate-transfer (BOT) high-speed rail project 
now underway.  Also on December 26, MOTC released a 
report on the financial situation of the Taiwan High- 
Speed Rail Corporation (THSRC).  The report indicated 
that the one-year postponement of the high-speed rail's 
inauguration would raise the total cost of the project 
by NT$ 14 billion (about USD 426 million) to NT$ 480 
billion (USD 14.6 billion).  MOTC estimated that THSRC 
needed to raise at least NT$ 65 billion (USD 2 billion) 
in additional capital to complete the project, twice 
previous estimates. 
 
Scientific Cooperation 
---------------------- 
 
¶11.  AIT/ESTH participated in an NSF-Taiwan NSC discussion 
of Taiwan's participation in the Atacama Large Millimeter 
Array (ALMA) project to build an array of 50 radio 
telescopes in the Atacama Desert of Chile.  Taiwan will 
provide about $30 million funding for the project over a ten- 
year period, enough for two or three of the telescopes.  A 
letter of intent was signed at the end of the visit by the 
NSF staff with the proviso that AIT and TECRO should sign an 
agreement on the matter before funding is committed. 
 
U.S. Companies Prepare for Avian Influenza 
------------------------------------------ 
 
¶12.  On December 16, Corning Company Taiwan gave an Avian 
Influenza (AI) presentation to Amcham which focused on the 
lessons Corning had learned from dealing with the SARS 
outbreak of 2003 on strategies to combat infectious disease 
outbreaks.  Corning said it would rely on local government 
to provide Tamiflu, if needed.  The presentation was an 
indication of the preparations for AI that some U.S. 
companies have made. 
 
PAAL