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Viewing cable 07TAIPEI63, Reorganization Signals Collapse of China Rebar

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Reference ID Created Released Classification Origin
07TAIPEI63 2007-01-10 01:44 2011-08-23 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY American Institute Taiwan, Taipei
VZCZCXRO3737
RR RUEHGH
DE RUEHIN #0063/01 0100144
ZNR UUUUU ZZH
R 100144Z JAN 07
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC 3668
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUCPDOC/USDOC WASHDC
RUEHBK/AMEMBASSY BANGKOK 3520
RUEHBJ/AMEMBASSY BEIJING 6170
RUEHUL/AMEMBASSY SEOUL 8372
RUEHGP/AMEMBASSY SINGAPORE 6741
RUEHKO/AMEMBASSY TOKYO 8353
RUEHML/AMEMBASSY MANILA 9888
RUEHJA/AMEMBASSY JAKARTA 3975
RUEHKL/AMEMBASSY KUALA LUMPUR 3625
RUEHHI/AMEMBASSY HANOI 3189
RUEHBY/AMEMBASSY CANBERRA 4407
RUEHWL/AMEMBASSY WELLINGTON 1672
RUEHHK/AMCONSUL HONG KONG 7403
RUEHGH/AMCONSUL SHANGHAI 0679
RUEHGZ/AMCONSUL GUANGZHOU 9861
UNCLAS SECTION 01 OF 02 TAIPEI 000063 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
STATE PLEASE PASS USTR 
STATE FOR EAP/RSP/TC, EAP/EP 
USTR FOR ALTBACH 
USDOC FOR 3132/USFCS/OIO/EAP/WZARIT 
TREASURY FOR OASIA/LMOGHTADER 
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF 
GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN 
 
E.O. 12958: N/A 
TAGS: EINV EFIN EIND ECON PINR TW
SUBJECT:  Reorganization Signals Collapse of China Rebar 
 
REF: 07 TAIPEI 00049 
 
SUMMARY 
------- 
 
1.  (SBU) On January 4, 2007, China Rebar Pacific Group (CRPG) 
announced reorganization plans for two affiliated companies 
triggering declines in share prices of all companies affiliated with 
CRPG and a run on two financial institutions affiliated with the 
group.  The court granted the two companies 90 days protection while 
it evaluates the reorganization plan (which creditor banks oppose). 
Whether CRPG's difficulties stem from years of poor business 
decisions, deliberate looting by its top executives, or a 
combination of factors is still unclear.  End Summary. 
 
Reorganization Plans 
-------------------- 
 
2.  (U) In a press conference on the morning of January 4, CRPG 
announced that the Taipei District Court (TDC) granted its two 
affiliated companies, China Rebar (CR) and Chia Hsin Food and 
Synthetic Fiber (CFSF), a 90-day protection period prior to a 
decision on the reorganization request.  During the protection 
period, the TDC suspended the bankruptcy process and creditors' 
actions against CR and will allow these two companies to operate 
normally.  However, the TDC restricted the two companies from 
transferring assets.  The two companies report a combined loss of 
NT$25.3 billion (US$778.7 million) over the past seven years and 
outstanding debt of NT$40.6 billion (US$1.25 billion). 
 
Immediate Impacts 
----------------- 
 
3.  (U) The CRPG's announcement promptly drove down share prices of 
all CRPG-affiliated companies by the daily limit (i.e., seven 
percent below the previous day closing prices) in the subsequent 
three trading days.  The announcement also prompted withdrawal of 
NT$32 billion (US$984.6 million) from Chinese Bank (CB) (reftel) and 
dumping of commercial paper underwritten by Great Chinese Bills 
Finance (GCBF) company.  The dumping has created an acute liquidity 
gap of NT$8.8 billion (US$271 million) for GCBF.  CRPG is the major 
shareholder of both CB and GCBF. 
 
Remedial Actions 
---------------- 
 
4.  (U) On January 5, the Financial Supervisory Commission (FSC), at 
CB's request, ordered the Central Deposit Insurance Corporation 
(CDIC) to take over CB.  On January 6, FSC ordered Cooperative Bank 
of Taiwan and Cathay United Bank to take over GCBF.  FSC also 
instructed Chunghwa Post Corporation, Bank of Taiwan, Land Bank of 
Taiwan, First Commercial Bank, and Business Bank of Taiwan to 
purchase commercial paper from GCBF to narrow GCBF's liquidity gap. 
 
5.  (U) In a press conference on January 6, Premier Su Tseng-chang, 
FSC Chairman Shih Jun-ji, Finance Minister Ho Chih-chin and Central 
Bank Governor Perng Fai-nan jointly guaranteed 100% protection for 
all deposits at CB and will provide another NT$40 billion (US$1.2 
billion) to meet withdrawal requirements. 
 
Suspected Financial Crimes and Misconduct 
----------------------------------------- 
 
6.  (U) According to press reports, the FSC suspects CRPG Chairman 
Wang You-tseng and his family members engaged in insider trading 
prior to the January 4 announcement of reorganization plans.  Local 
media speculate that Wang may have embezzled dozens of billions of 
 
TAIPEI 00000063  002 OF 002 
 
 
NT Dollars to fund investment projects in China.  Law enforcement 
agencies are now investigating these allegations.  Legislators urged 
FSC Chairman Shih and Finance Minister Ho to step down to take 
responsibility for failing to act earlier. 
 
Effect on Stock Market 
---------------------- 
 
7.  (U) In addition to the price drops for CRPG-affiliated stocks, 
Taiwan's stock price index plunged 1.25% on January 5 and another 
1.26% on January 6.  During these two days, share prices of banking 
issues declined 3%, slightly more than the 2.5% drop in the general 
stock price index.  In addition to the influence of CRPG, local 
observers attributed the drops partly to market corrections and 
partly to press reports about a new nuclear test by North Korea 
which also drove down share prices by 1.5% in Tokyo, 0.8% in Seoul, 
2.8% in Shanghai, and 3.1% in Bangkok on January 5. 
 
8.  (U) Yung-cheng Securities Investment Consultant Wang Wen-liang 
commented on January 8 that a market correction was to be expected 
since Taiwan's stock price had surged 25% in the second half of 
2006.  He noted market corrections took place throughout East Asia 
on January 8 when stock prices dropped 1.1% in Seoul, 1.5% in Tokyo, 
1.5% in Manila, and 0.9% in Hong Kong.  On January 9, Taiwan's stock 
price index rebounded 0.7%. 
 
What Went Wrong 
--------------- 
 
9.  (SBU) Comment: While it is common for business groups to rise 
and fall, the difficulties that forced CRPG to reorganize CR and 
CFSF appear to be the consequence of both a poor business strategy 
and criminal misconduct by the company's top executives.  Taiwan 
regulators have responded appropriately to this crisis by 
immediately reassuring depositors and providing funds to satisfy the 
demand for withdrawals.  The FSC actions in ordering the takeover of 
CB and GCBF also appear to be prudent moves designed to stop the 
spread of the problem to other financial institutions.  Still, 
regulators should have noticed the problems CRPG was having earlier 
and taken preventative action. 
 
YOUNG