VZCZCXRO3410
RR RUEHGH
DE RUEHIN #0564/01 0720900
ZNR UUUUU ZZH
R 130900Z MAR 07
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC 4418
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUCPDOC/USDOC WASHDC
RUEHBK/AMEMBASSY BANGKOK 3619
RUEHBJ/AMEMBASSY BEIJING 6462
RUEHUL/AMEMBASSY SEOUL 8521
RUEHGP/AMEMBASSY SINGAPORE 6845
RUEHKO/AMEMBASSY TOKYO 8562
RUEHML/AMEMBASSY MANILA 9971
RUEHJA/AMEMBASSY JAKARTA 4019
RUEHKL/AMEMBASSY KUALA LUMPUR 3700
RUEHHI/AMEMBASSY HANOI 3252
RUEHBY/AMEMBASSY CANBERRA 4477
RUEHWL/AMEMBASSY WELLINGTON 1736
RUEHHK/AMCONSUL HONG KONG 7713
RUEHGH/AMCONSUL SHANGHAI 0881
RUEHGZ/AMCONSUL GUANGZHOU 0058

UNCLAS SECTION 01 OF 02 TAIPEI 000564 
 
SIPDIS 
 
SIPDIS 
 
STATE PLEASE PASS USTR 
STATE FOR EAP/RSP/TC, EAP/EP 
USTR FOR ALTBACH AND STRATFORD 
USDOC FOR 3132/USFCS/OIO/EAP/WZARIT 
TREASURY FOR OASIA/LMOGHTADER 
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF 
GOVERNORS, NEW YORK FRB/MARA BOLIS AND SAN FRANCISCO FRB/TERESA 
CURRAN 
 
E.O. 12958: N/A 
TAGS: EINV EFIN ECON PINR TW
SUBJECT:  Taiwan's 2006 Balance of Payments 
 
 
¶1.  SUMMARY:  Taiwan's current account surplus in 2006 surged nearly 
60% to US$25 billion.  The C/A surplus was largely offset by a huge 
capital outflow of direct investment and insurance firms' portfolio 
investment.  Depreciation of the US Dollar (USD) drove up the USD 
value of Taiwan's EURO and Yen foreign exchange (FX) reserves. 
Taiwan's valuation-adjusted FX reserves in 2006 grew by US$13 
billion or 5% to US$266 billion.  In 2007, Taiwan's C/A surplus may 
be totally offset by net capital outflow due to Taiwan's low 
interest rates.  END SUMMARY. 
 
Favorable Trade Leads Keeps C/A Positive 
---------------------------------------- 
 
¶2.  Taiwan's current account (C/A) has enjoyed surpluses every year 
since 1981.  Its C/A surplus in 2006 surged nearly 60% to US$25 
billion from US$16 billion in 2005.  Over 90% of the C/A surplus or 
US$23 billion came from merchandise trade, boosted by double-digit 
growth in exports to developed markets as well as shipments of 
production inputs to China and Southeast Asia, where many Taiwan 
manufacturing firms have located their export manufacturing. 
 
Deep Cut in Service Trade Deficit 
--------------------------------- 
 
¶3.  Two other sources of the C/A surplus were (1) triangle trade and 
(2) interest earned from Taiwan's FX reserves.  Triangle trade 
(i.e., orders placed in Taiwan and shipped from overseas production 
bases) began to play an important role in Taiwan's service trade in 
the mid-1990s as a growing number of manufacturing firms began to 
relocate their factories overseas, particularly in the PRC.  Income 
generated from triangle trade in 2006 increased to US$14.9 billion 
or 6.7% of total merchandise exports, leading to a 37% cut in 
Taiwan's service trade deficit from US$6.6 billion in 2005 to US$4.2 
billion in 2006. 
 
TBC Contributes to Factor Income's Inflow 
----------------------------------------- 
 
¶4.  Taiwan's FX reserves, ranking third largest in the world, have 
brought huge interest earnings which reversed the factor income 
account from a chronic net outflow to a chronic net inflow in 1982. 
In 2006, the US Federal Reserve Banks steadily raised interest 
rates; together with Taiwan Central Bank's (TCB) effective 
management of its FX assets, this contributed to a 20% growth in 
interest earned from Taiwan's FX reserves to US$14.7 billion and 20% 
growth in the factor income account's inflow to US$20 billion in 
¶2006. 
 
Capital Outflow 
--------------- 
 
¶5.  Capital outflow caused Taiwan's financial account (F/A) have a 
deficit of US$23 billion in 2006, down from a surplus of US$1.7 
billion in 2005.  Capital left Taiwan mainly in the form of foreign 
direct investment (FDI) and portfolio investment (PI).  Total 
outbound FDI and PI in 2006 increased 26% to US$51.4 billion, which 
was US$22 billion more than the inbound total. 
 
China Accounts for Majority of Taiwan FDI 
----------------------------------------- 
 
¶6.  In 2006, outbound FDI increased 21% to US$7.3 billion, a 
majority of which went to China.  The TCB's FDI statistics are not 
organized by country, but approval figures compiled by the Ministry 
of Economic Affairs (MOEA) are organized by country.  FDI approved 
in 2006 totaled US$11.9 billion.  Of this amount, 80% went to China, 
including 64% directly to China and 16% (according to Investment 
 
TAIPEI 00000564  002 OF 002 
 
 
Commission estimates) indirectly to China through such third 
territories as Caribbean tax havens.  The combined share of approved 
FDI going directly and indirectly to China exceeded 85% in 2005. 
 
Low Interest Rate Drives up Outbound PI 
--------------------------------------- 
 
¶7.  While openness of Taiwan's stock market has attracted many 
foreign portfolio investors, low interest rates are driving local 
funds to seek higher yields in overseas financial markets.  Taiwan's 
interest rates are among the lowest in the world.  The interest rate 
gap between Taiwan and the United States broadened from less than 
half a percentage point in 2004 to above 3 percentage points in 
¶2006.  The interest rate gap has brought heavy pressure on Taiwan 
insurance companies which have to meet high-yield commitments made 
to policy owners.  Consequently, overseas stocks and bonds bought by 
Taiwan insurance firms steadily increased from US$22.6 billion in 
2004 and US$31 billion in 2005 to US$42.5 billion in 2006.  In 2006, 
insurance firms accounted for 86% of Taiwan's total outbound PI. 
 
Increase in FX Assets 
--------------------- 
 
¶8.  The FX reserves held by the TCB (before valuation adjustment) 
increased US$6.1 billion.  However, valuation adjustment of the EURO 
and Japanese Yen reserves drove up the increase to US$12.9 billion. 
Taiwan's FX reserves grew in 2006 to US$266 billion, about 30% of 
which are in the Euro and Japanese yen.  In 2006, the EURO and the 
Japanese Yen appreciated 11% and 13.6% against the USD, 
respectively. 
 
Prospects 
--------- 
 
¶9.  Taiwan's current account will continue in surplus in 2007 as 
Taiwan remains an export-oriented economy and a production input 
supplier to the many Taiwan firms located in China and Southeast 
Asian nations.  However, Taiwan's FX reserves may level off or even 
decline in 2007 and beyond as the current account surplus may be 
totally offset by a financial account deficit if the TCB continues 
to keep local interest rates far below levels in the United States 
and Europe.  The interest rate gap will force insurance firms and 
other Taiwan portfolio investors to seek portfolio investment 
opportunities overseas. 
 
YOUNG