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

UNCLAS TAIPEI 000064 
 
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:  Capital Inflow Lifting Taiwan Markets 
 
¶1.  SUMMARY.  Expectations of a weaker U.S. currency in 2006 
have prompted portfolio investors to move capital from the 
United States to East Asia recently.  Huge capital flows 
have contributed to substantial rises in stock prices and 
appreciation of currencies across the region.  In the first 
six trading days of January 2006, Taiwan's stock price index 
rose 3.0%, and the NT dollar gained 2.7%.  Higher stock 
prices and strong Asian currencies may continue for several 
months.  END SUMMARY. 
 
Money Flows In 
-------------- 
 
¶2.  The U.S. Federal Reserve Board has raised its benchmark 
interest rate 14 times in the past year and-a-half, but 
analysts expect the FED to now hold interest rates steady. 
In addition, U.S. non-farm employment reported in early 
January did not increase as much as expected.  This 
expectation has weakened the US dollar (USD) and prompted 
portfolio investors to redeploy capital from the United 
States to East Asia.  According to an executive at a U.S. 
bank in Taiwan, the capital influx is driving up stock 
prices and currencies throughout East Asia. 
 
Stock Market Moves Up 
--------------------- 
 
¶3.  In Taiwan, the huge capital inflow has far outweighed 
the adverse effect of President Chen Shui-bian's 2006 New 
Year Message calling for tighter cross-Strait economic 
control (proactive management, and effective 
liberalization).  In the first six days of January 2006, 
Taiwan's stock price index rose 3.0%, higher than the rise 
of 1.95% in Tokyo, 2.4% in Singapore, and 1.17% in Seoul but 
less than the rise of 4.2% in Jakarta and 3.86% in Bangkok. 
Taiwan's stock price index declined 0.2% on January 6 
(Friday) but rose 0.7% on January 9 (Monday) to 6,742.39 
points. 
 
NT Appreciates 
-------------- 
 
¶4.  On the foreign exchange market, the NT dollar (NTD) 
gained 2.7% in the first six days of January to NT$32.016 
per USD.  The NTD's gain was more than the appreciation of 
any other Asian currency, including 1.39% for the Japanese 
yen, 2.4% for the South Korean won, 1.05% for the 
Singaporean dollar, and 1.78% - 2.34% for Indonesian and 
Thai currencies.  The NTD lost 18.2 NT cents on January 6 
(Friday) but the loss was far offset by a gain of 24.6 NT 
cents on January 9 (Monday) to NT$31.952 per USD. 
 
¶5.  According to market participants, capital recently 
flowing into East Asia is short term, mostly from U.S. 
retirement funds.  Analysts believe that the investment 
funds going into regional stock markets will stay for at 
least three to six months.  AIT believes that higher stock 
prices and a stronger NTD (against the USD) will prevail 
throughout the first half of 2006, buoyed additionally by 
the strong attraction of investing in Taiwan's LCD/TFT (flat 
panel display) industries, which anticipate a very good 
year. 
 
Keegan