MACROECONOMICS

OF RATES AND RATINGS 
CROSS-STRAIT RELATIONS

PARSED WORDS AND CHINESE LAWMAKING

DOMESTIC NEWS

PAN-BLUES SUFFER LEGAL DEFEATS

KOO CHEN-FU DIES 
INTERNATIONAL

TAIWAN DOES WHAT IT CAN FOR TSUNAMI RELIEF

BUSINESS

OH, TO BE FORMOSA

TAINAN GETS BUSY

MACROECONOMICS

OF RATES AND RATINGS

Leading up to the Central Bank of China's (CBC) December 30 meeting -at which the bank was to consider increasing the discount rate from 1.625%, where it had stood since September 30 -observers couldn't seem to agree what the CBC would do. Some predicted an increase of 25 basis points, some put their money on 12.5, and some thought it plausible that the bank would make no move at all. This third group included Wu Rong-I, president of the Taiwan Institute for Economic Research (TIER), who suggested at a press conference that falling petroleum prices and Taiwan's strengthening dollar would allay the CBC's inflation fears. That would cause the bank to keep rates at near-historic lows, he predicted, notwithstanding the bank's stated concerns about capital flowing out of Taiwan to higher-rate environments like the United States.

In the end -believing that, despite falling oil prices and a strong currency, inflation was a threat that required action -the bank took the middle way, raising rates 12.5 basis points and challenging the local economy to withstand the mild hike. In justifying its action, the CBC noted that prices for imports had increased 8.92% from January through November of 2004, and that high wholesale prices -along with high capacity utilization in the manufacturing sector -were likely to put continued pressure on topline inflation. In fact, the bank predicted that 2005 CPI was likely to exceed 2% -a high-enough level, from the CBC's perspective, to justify a little touch of cooling-off.

Arguing that Taiwan's economy was likely to continue growing despite the tighter rate environment, the bank noted the Directorate-General of Budget, Accounting and Statistics' (DGBAS) estimate that the local economy had grown 5.93% in 2004 -and also noted that the DGBAS was projecting a 2005 growth rate of 4.56%. So with both long- and short-term interest rates below levels characterized by the bank as "normal," the CBC elected to tack on the extra 12.5 bips, partly to discourage the capital misallocations that it feared could result from a negative real rate.

The bank's vote of confidence in the short-term economy followed longer-term votes of confidence by two ratings agencies. First, Fitch Ratings announced in mid-December that it would maintain both its A+ sovereign rating for Taiwan and its AA rating for the NT dollar. A week later, Moody's decided to maintain Taiwan's foreign currency issuer rating at Aa3, with a stable outlook. Just the previous month, Standard & Poor's had lowered its Taiwan outlook to "negative," meaning that a lower overall rating could be around the corner. But the decisions by Fitch and Moody's made it seem that S&P -which had announced its decision only days before the legislative election -might have overreacted to the uncertainty that often surrounds voting.

Taiwan's economy nonetheless faces some challenges, including the impact of NT appreciation. The problem with a strong NT is not simply that it makes Taiwan's exports less attractive. It also, as Goldman Sachs pointed out in December, results in lower corporate earnings that in turn can create weakness in the TAIEX -weakness that can radiate throughout the economy. Goldman reckons that a further 10% depreciation in the U.S. dollar could reduce Taiwanese companies' earnings by about 14%.

One more note: Premier Yu Shyi-kun announced in December that the government's economic goals for 2005 include a GDP growth rate of 5%. This seems a tad optimistic -compared not only to the DGBAS projection of 4.56% but also to the 4.62% growth rate projected by TIER and the 4.37% by the Chung-Hua Institution for Economic Research.

CROSS-STRAIT RELATIONS

PARSED WORDS AND CHINESE LAWMAKING

It doesn't take much to get Taiwan-watchers pulling out their hair and grinding their teeth -any representative of the U.S. government can provoke that response simply by making a statement about cross-Strait relations that is less than perfectly careful. Remember when a possibly jetlagged U.S. Secretary of State Colin Powell so recklessly used the term "reunification" during an October visit to Beijing? Hair was pulled, teeth were ground, Powell backtracked, calm returned. The same cycle played out in December when U.S. Deputy Secretary of State Richard Armitage opined that the Taiwan Relations Act does not require the United States to defend Taiwan from attack by China (true, incidentally), that the power to commit the United States to war rests with Congress (true, at least in terms of constitutional theory, though not so much in practice), and that Taiwan is "probably the biggest landmine" in Washington-Beijing relations (other candidates, anybody?).

Within 24 hours of Armitage's statements, Taiwan's government was vowing to seek "clarification" and opposition politicians were laying blame for this new disaster at the doorstep of President Chen Shui-bian, while everyone else on earth not directly involved in the "triangular relationship" was paying no attention whatsoever. (Separately, the United States announced that it would, for the first time since switching its diplomatic recognition from Taipei to Beijing in 1979, post uniformed military personnel to the staff of the American Institute in Taiwan -and that it intended to build a new facility for the substitute embassy on a Neihu site for which it had signed a 99-year lease.)

Something potentially worrisome was going on across the Strait, however, as China prepared to pass an anti-secession law whose evident purpose was to provide a legal basis for launching an attack against Taiwan. The object of this theoretical attack reacted with predictable outrage -"It's an extreme and drastic move; we cannot tolerate it," said Joseph Wu, chairman of the Mainland Affairs Council. Washington's pronouncements on the subject were more subdued, but Powell himself said that now is no time to raise tension in the Taiwan Strait. And the issue was reportedly raised in a meeting at the State Department between Armitage and Chen Yunlin, China's minister of Taiwan Affairs.

Another topic that might have come up in that meeting is a white paper recently produced by China's government, in which cross-Strait relations are characterized as "grim" and it is said of Taiwanese independence that "the Chinese people and armed forces will resolutely and thoroughly crush it at any cost."

DOMESTIC NEWS

PAN-BLUES SUFFER LEGAL DEFEATS

In the aftermath of their loss in March's presidential election, Kuomintang Chairman Lien Chan and People First Party Chairman James Soong filed two lawsuits -one seeking to overturn the Central Election Committee's certification of President Chen as the winner and the other to have the entire election annulled. The first was booted out of court in early November, but the second had to wait for a ruling until the middle of December. It, like its mate, was pronounced without merit by the Taiwan High Court. The inevitable appeals remain, but the court seems through its December action to have snuffed out the pan-blue leaders' last glimmer of quasi-reasonable hope that they could end up as election victors.

But even putting aside the appeals, the litigiousness wasn't finished. On December 30, the Council of Grand Justices struck down sections of what was technically known as the March 19 Shooting Truth Investigation Special Committee Statute. That statute -establishing what was informally known as the 319 commission, or the "truth" commission -had established a legislative committee with broad investigative and prosecutorial powers to ascertain exactly what had happened in Tainan when President Chen took a bullet to the belly and Vice President Annette Lu got one on the knee. But, in the opinion of the grand justices, the powers that the pan-blue legislators had proposed to give themselves were far too expansive, and the justices declared the statute's offending sections null. "Why can the Ukraine people [overturn an election outcome] and the Taiwan people cannot?" was the plaintive and evidently unironic question of one pan-blue legislator.

KOO CHEN-FU DIES

In early January, just as Taiwan and China were beginning their annual ritual of negotiating by proxy -or not negotiating at all -over the establishment of special cross-Strait flights for Lunar New Year, the man who in the 1990s was most closely associated with improved relations between the two countries passed away.

Koo Chen-fu, who was about to turn 88 years old when he died of renal failure in Taipei, was first of all a business leader, as chairman of the Taiwan Cement Corp. and head of the Koo's Group that was active in petrochemicals, telecommunications, securities, and other fields. But beginning in 1991, he was also named chairman of the semi-governmental Straits Exchange Foundation (SEF), Taiwan's counterpart to China's Association for Relations Across the Taiwan Strait (ARATS) for carrying out government-sanctioned but technically private contact between the two sides. Koo's most memorable moment as SEF chairman came in 1993, when he went to Singapore to meet ARATS chairman Wang Daohan to participate in the closest thing to negotiations that China and Taiwan had ever managed. Later, Koo traveled to China to meet then-Chinese president Jiang Zemin, attempting to break up a diplomatic logjam that had stymied relations since 1995, when former president Lee Teng-hui had visited the United States over China's objections. In the days after Koo's death, all was confusion on the issue of Lunar New Year flights, with China first excluding the possibility of establishing them and then seeming to entertain the idea after all.

INTERNATIONAL

TAIWAN DOES WHAT IT CAN FOR TSUNAMI RELIEF

As an island, with earthquakes rumbling off its shores most days of the week, Taiwan can not feel very safe after seeing what the horrifying tsunami of December 26 did to Sumatra and Sri Lanka. What Taiwan can do, however, is sympathize and offer help, and so in the disaster's aftermath the government donated US$50 million to the relief efforts, an amount that, at least at the time, made Taiwan one of the top 10 donor nations. The size of the contribution didn't earn Taiwan a seat at the table when the major donors met at a U.N.-sponsored conference on the relief effort, however, since certain aspects of politics evidently remain even in the face of horror.

It wasn't only the government that got involved in the recovery effort. Private citizens donated millions of NT dollars to charities, Chinese Petroleum Corp. added in NT$100 million (US$1.56 million), NGOs sent medical teams, and Taiwanese performers signed up for a Hong Kong-based TV fundraiser for tsunami relief.

BUSINESS

OH, TO BE FORMOSA

The Formosa Plastics Group, Taiwan's leading conglomerate, has generated a lot of news lately by making money and spending it. First it was announced that Formosa Plastics Corp., the country's largest petrochemical concern and one of the Group's most important subsidiaries, would invest NT$120 billion (US$3.74 billion) to build an oil refinery on 2,000 hectares of land in Yunlin County. The massive facility's production capacity is slated to be 600,000 barrels of refined oil a day, greater than the entire current capacity of Chinese Petroleum Corp. (CPC), now Taiwan's largest refiner. Two weeks later, it was reported that Formosa Heavy Industries Corp. had filed an application to build Taiwan's largest steel facility on 600 hectares, also in Yunlin County, with an annual production capacity of up to 15 million tonnes. The project is projected to cost NT$130 billion (US$4.05 billion).

Between these two announcements, Formosa Plastics Group was judged by China Credit Information Service as 2003's most profitable business group in Taiwan, with profits of NT$70.56 billion (US$2.2 billion). There was also news from CPC. Bloomberg reported that the company will take a 49% in a new joint venture to build an NT$370 billion (US$11.6 billion) refinery and petrochemical complex. The other partners, whose names have not yet been disclosed, are said to be 10 petrochemical producers and two financial holding companies.

TAINAN GETS BUSY

On January 6, Tainan County Magistrate Su Huan-chih held a press conference in Taipei to discuss economic-development projects in the Tainan area. One of the initiatives is a plan to serve as host city for the 2008 Taiwan World Exhibition -which would entail investing NT$19.5 billion (US$607 million) in building a new exhibition hall. (This project is dependent on approval from the Legislative Yuan -which Su said he considers likely in the first few months of 2005.) Another initiative is continued development of the Tainan Science Park, a facility that Su says now boasts 127 tenants, including multinationals like Corning and 3M.

Su also discussed a soon-to-be-established area in the park that is intended to host a complete supply chain for TFT/LCDs. Su said that the TFT/LCD project has already received commitments of involvement from Wistron and Chi Mei.