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COUNTRY REPORT

Taiwan

May 2000

The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom

At a glance: 2000-01OVERVIEWThe government of Taiwan’s newly elected Democratic Progressive Party(DPP) president, Chen Shui-bian, will make progress in 2000-01 in clampingdown on corruption. Mr Chen’s powers will, however, be constrained by theDPP’s minority status in the Legislative Yuan. Cross-Strait contacts are likelyto resume in 2000-01, but relations between Taiwan and China will remaintense throughout the forecast period. The economy will grow by 6.8% in2000 and by 6.3% in 2001. Strengthening recurrent revenue growth willhelp to reduce the fiscal deficit from 5.9% of GDP in 1999 to 4.3% in 2001.Consumer price inflation will average 1.9% in 2000 and 2.5% in 2001. Thecurrent-account surplus will fall from US$5.8bn (2% of GDP) in 1999 toUS$2.1bn (0.6% of GDP) in 2001.

Key changes from last monthPolitical forecast• Apparently in response to the moderate mainland policy stance adopted

by Mr Chen, the government in Beijing has in recent weeks moderated itsdefinition of “One China”. As the new formulation is less disagreeable toTaiwan’s government, the change may allow cross-Strait talks to resume.

Economic policy outlook• The conclusion on May 19th of a Sino-EU market-opening agreement has

made it more likely that Taiwan will join the World Trade Organisation(WTOP) at some point during the forecast period, and probably before theend of 2000. Accession to the trade body will trigger implementation ofwide-ranging market-opening commitments.

Economic forecast• The EIU’s forecast for overall GDP growth in Taiwan is unchanged:

recently released GDP growth figures for the first quarter of 2000 areconsistent with the growth rate of 6.8% for 2000 that we forecast in April.Our inflation and currency forecasts are also unchanged. We have,however, revised down the size of the expected current-account surplus in2000. In April we expected a surplus of US$4bn (1.9% of GDP) this year;we now expect the surplus to be just US$3.1bn (0.9% of GDP).

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ISSN 0269-672X

Symbols for tables“n/a” means not available; “–” means not applicable

Printed and distributed by Redhouse Press Ltd, Unit 151, Dartford Trade Park, Dartford, Kent DA1 1QB, UK

Taiwan 1

EIU Country Report May 2000 © The Economist Intelligence Unit Limited 2000

Contents

3 Summary

4 Political structure

5 Economic structure6 Annual indicators6 Quarterly indicators

7 Outlook for 2000-017 Political forecast8 Economic policy outlook9 Economic forecast

13 The political scene

20 Economic policy

24 The domestic economy24 Output and demand25 Employment, wages and prices32 Sectoral trends

35 Foreign trade and payments

List of tables

9 Forecast summary10 International assumptions summary11 Gross domestic product by expenditure25 Gross domestic product by expenditure, year on year26 Prices27 Wages and productivity27 Unemployment27 Money supply30 Banking statistics32 Manufacturing production35 Foreign trade, Jan-Apr36 Exports, Jan–Apr37 Imports, Jan–Nov37 Direction of trade, Jan–Apr38 Balance of payments

2 Taiwan


List of figures

12 Gross domestic product12 New Taiwan dollar real exchange rates27 Prices28 Money supply28 Taiwan Stock Exchange Capitalisation Weighted Index31 Net institutional foreign portfolio investment35 Foreign trade

Taiwan 3


Summary

May 2000

The effectiveness of the government of the newly elected president, Chen Shui-bian, could be constrained by opposition from the former ruling party, theKuomintang (KMT). Negotiations between China and Taiwan may resume in2000, but cross-Strait relations will remain tense. GDP will grow by 6.8% in2000 and by 6.3% in 2001, boosted by recovering domestic demand growth.Inflation will pick up slightly, and the current-account surplus will narrow.

Mr Chen, elected on March 18th, has appointed a coalition cabinet. Mr Chen’svictory has caused turmoil within the KMT. A new party, the People First Party,has been formed. The National Assembly has been transformed from astanding to an ad hoc institution. The new government has been moderate onTaiwan independence, and China has made some political concessions.

Monetary policy has been tightened. Construction of the fourth nuclear powerstation has continued to cause controversy. A further liberalisation of thedomestic telecoms market has been unveiled. The ban on direct trade betweenTaiwan’s outlying islands and the mainland has been removed.

In the first three months of 2000 Taiwan’s GDP grew by 7.9% year on year.Growth was strong because of strengthening domestic demand growth, and acontinued robust expansion of sales overseas of Taiwan-made goods. As theEIU had previously forecast, price pressures in Taiwan have begun to firm inrecent months. The rate of wage inflation has also increased, and theunemployment rate has declined. Based on narrow measures, money supplygrowth has been rapid. The stockmarket has been volatile. The government hastaken over the management of two troubled financial institutions. A TaiwanInnovative Growing Entrepreneurs (TIGER) market has been launched. High-tech production has surged. Local firms have diversified into thetelecommunications sector. Three licences to provide fixed telecom networkservices have been awarded. Local firms have launched an attempt to dictateglobal trends in the production of Local Area Network equipment.

Despite continued strong overseas demand for high-tech products, themerchandise trade surplus has narrowed sharply. The current-account surplushas also fallen, but the balance-of-payments surplus has widened, boostingforeign-exchange reserves and supporting the local currency.

Editor: Paul CaveyEditorial closing date: May 31st 2000

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] report: Full schedule on www.eiu.com/schedule

May 31st 2000

Outlook for 2000-01

The political scene

Economic policy

The domestic economy

Foreign trade andpayments

4 Taiwan


Political structure

Republic of China

Representative democracy in the process of emerging from a one-party state

The president nominates a prime minister to head the Executive Yuan (cabinet). TheExecutive Yuan has three arms: the ministries and commissions; the 19 subordinateadministrative organs of state; and the Executive Yuan Council, the supremepolicymaking body

President, directly elected for a term of four years

The 225-seat Legislative Yuan, formerly a rubber-stamp parliament, has in the pastdecade become a more powerful body. It has evolved into a genuine forum for debateand the development of policy, and has recently assumed at the expense of the NationalAssembly responsibility for initiating constitutional amendments

A series of local councils operate but function mainly on an administrative level. Theprovincial government has been downgraded and the provincial assembly abolished

December 1998 (local government and Legislative Yuan), March 2000 (presidential);next elections, 2001 (Legislative Yuan), 2004 (presidential)

The government is an informal coalition led by the Democratic Progressive Party (DPP).The party which governed Taiwan for 55 years until 2000, the Kuomintang (KMT), is stillthe largest party in the Legislative Yuan; the DPP has just 70 parliamentary seats

The KMT and the DPP are the main political parties. Other parties include the New Partyand the People First Party (PFP)

President Chen Shui-bianVice-president Annette LuPresident, Executive Yuan (premier) Tang FeiVice-president, Executive Yuan (vice-premier) Yu Shyi-kunGeneral-Secretary, Executive Yuan Wea Chi-lin

Control Yuan Cheng Shui-chiExamination Yuan Chiu Chuang-huanJudicial Yuan Shih Chi-yangLegislative Yuan Liu Sung-pan

Economic affairs Lin Hsin-iFinance Shea Jia-dongForeign affairs Tien Hung-maoInterior Chang Po-yaJustice Chen Ding-nanNational defence Wu Shih-wenTransport & communications Yeh Chu-lang

Tsai Ing-wen

Perng Fai-nan

Official name

Form of state

The executive

Head of state

National legislature

Local government

National elections

National government

Main political organisations

Main members of theExecutive Yuan

Presidents

Key ministers

Chairman of the MainlandAffairs Council

Central Bank governor

Taiwan 5


Economic structure

Annual indicators1995 1996 1997 1998 1999

GDP at market prices NT$ bn 7,017.9 7,678.1 8,328.8 8,939.0 9,312.2

GDP US$ bn 265.0 279.6 290.2 267.2 288.6

Real GDP growth (%) 6.4 6.1 6.7 4.6 5.7

Consumer price inflation (av; %) 3.7 3.1 0.9 1.7 0.2

Population (m) 21.2 21.4 21.5 21.8 22.0

Exports of goods fob (US$ m) 111,214 115,462 121,725 110,178 121,119

Imports of goods fob (US$ m) –97,979 –97,919 –107,843 –99,862 –106,077

Current–account balance (US$ m) 5,474 10,923 7,051 3,437 5,784

Foreign–exchange reserves excl gold (US$ m) 90,310 88,038 83,502 90,341 106,200

Total external debt (US$ bn) 27.1 27.5 33.5 30.0 31.5a

Debt–service ratio, paid (%) 2.0 2.3 2.0 2.2a 2.1a

Exchange rate (av) NT$:US$ 26.49 27.46 28.70 33.46 32.27

May 25th 2000 NT$30.81: US$1

Origins of gross domestic product 1999 % of total Components of gross domestic product 1999 % of total

Agriculture, forestry & fishing 2.6 Private consumption 60.8

Mining 0.5 Public consumption 13.1

Manufacturing 26.4 Gross fixed investment 22.9

Utilities 2.2 Stockbuilding 1.3

Construction 3.9 Exports of goods & services 47.2

Transport, storage & communications 6.8 Imports of goods & services –45.4

Commerce 18.4 Total at market prices 100.0

Finance, insurance & real estate 20.6

Total at market prices incl others 100.0

Principal exports 1998 US$ bn Principal imports 1999 US$ bn

Machinery & electrical equipment 64.2 Machinery & electrical equipment 50.6

Textiles & clothing 14.2 Chemicals 10.6

Base metals & metal manufactures 11.6 Base metals & products 9.5

Plastic & rubber articles 7.5 Precision instruments, clocks & watches 6.2

Vehicles, aircraft & ships 5.2 Crude petroleum 4.6

Chemicals 3.3 Vehicles, aircraft & ships 4.0

Animals & animal products 1.1 Textile products 2.8

Main destinations of exports 1999 % of total Main origins of imports 1999 % of total

US 25.4 Japan 27.6

Hong Kong 21.4 US 17.8

Japan 9.8 South Korea 6.5

Netherlands 3.5 Germany 4.8

Germany 3.4 Malaysia 3.5

UK 3.1 Australia 2.7

Singapore 3.1 Indonesia 2.1a EIU estimate.

6 Taiwan


Quarterly indicators 1998 1999 2000

2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr

OutputGDP at 1996 prices (NT$ bn) 2,097 2,186 2,212 2,156 2,234 2,298 2,362 n/a % change, year on year 5.2 4.1 3.4 4.2 6.5 5.1 6.8 n/aIndustrial production index (1996=100) 110.3 112.9 115.4 108.6 120.9 118.5 127.2 121.0 % change, year on year 3.5 3.4 0.8 6.1 9.6 5.0 10.2 11.5

Financial indicatorsExchange rate NT$:US$ (av) 33.65 34.55 32.63 32.62 32.71 32.02 31.70 30.74 NT$:US$ (end-period) 34.36 34.37 32.25 33.15 32.30 31.78 31.35 30.43M1 (end-period; NT$ bn) 3,660.6 3,607.2 3,730.4 3,911.0 4,039.9 4,130.5 4,286.7 4,724.6 % change, year on year 1.8 –2.0 2.5 2.3 10.4 14.5 14.9 20.8M2 (end-period; NT$ bn) 15,473.7 15,768.1 16,231.6 16,688.8 16,931.0 17,132.3 17,428.9 n/a % change, year on year 8.3 8.7 9.1 7.8 9.4 8.7 7.4 n/aTSE weighted stockmarket index (end-period; Jun 3oth 1966=100) 7,548.8 6,834.0 6,418.4 6,881.7 8,467.4 7,598.8 8,448.8 9,855.0 % change, year on year –16.4 –21.5 –21.6 –24.3 12.2 11.2 31.6 43.2

Employment, wages and pricesEmployment (‘000) 9,267 9,273 9,327 9,321 9,345 9,406 9,467 n/aUnemployment rate (% of the labour force) 2.5 3.0 2.9 2.8 2.8 3.1 3.0 n/aAverage nominal monthly wages (NT$) 36,053 36,284 36,530 49,907 37,170 37,952 38,567 n/a % change, year on year 2.1 1.5 –3.4 –0.4 3.1 4.6 5.6 n/aConsumer prices (1996=100) 102.5 102.6 103.8 102.3 102.3 103.0 103.6 103.2 % change, year on year 1.7 0.6 2.9 0.7 –0.1 0.4 –0.1 0.8Wholesale prices (1996=100) 101.0 100.3 95.9 95.0 94.9 95.6 96.8 96.0 % change, year on year 2.7 1.2 –6.3 –8.0 –6.1 –4.7 0.9 1.1

Sectoral trendsManufacturing index (1996=100) 111.0 112.3 117.0 109.6 122.6 118.9 130.2 n/a % change, year on year 3.3 2.6 0.3 4.8 10.4 5.8 11.3 n/aElectrical machinery index (1996=100) 125.1 133.3 147.5 137.4 154.9 155.1 180.8 n/a % change, year on year 11.5 10.8 6.0 16.1 23.8 16.4 22.6 n/a

Foreign trade (NT$ bn)Exports fob 928 969 917 906 969 968 1,080 1,012Imports cif –884 –851 –875 –820 –852 –890 –1,006 –971Trade balance 44 118 42 86 117 78 74 41

Foreign payments (US$ m)Merchandise trade balance 2,594 4,316 2,473 3,620 4,231 3,837 3,600 n/aServices balance –1,608 –2,098 –2,258 –1,973 –2,577 –2,514 –2,845 n/aIncome balance 206 142 875 832 313 425 1,101 n/aCurrent-account balance 766 1,931 756 2,076 1,441 870 1,475 n/aReserves excl gold (end-period) 83,921 83,840 88,324 92,514 96,176 100,126 104,139 112,230

Sources: Council for Economic Planning & Development, Industry of Free China; Central Bank of China, Financial Statistics; National Statistics of Taiwan, Monthly Bulletin of Statistics.

Taiwan 7


Outlook for 2000-01

Political forecast

In his inauguration speech on May 20th Taiwan’s new president, Chen Shui-bian, pledged that creating “clean and upright” government would be apriority for his administration. Even though Mr Chen’s Democratic ProgressiveParty (DPP) only occupies a minority of seats in Taiwan’s parliament, theLegislative Yuan, his government is expected to make progress during the nexttwo years in achieving this aim. The new president’s decision to include in hiscabinet members of the former ruling party, the Kuomintang (KMT), will helphim to build support within the legislature (12 members of Mr Chen’s cabinet,including the prime minister, Tang Fei, are KMT members). In any case, even ifthe KMT wanted to oppose Mr Chen’s crack-down on corruption, it is not in astrong position to do so. Corruption is deeply unpopular in Taiwan. As theKMT received a drubbing in the presidential poll—the party’s official candi-date, Lien Chan, won just 23.1% of the vote in March—it will be reluctant tobe seen ignoring such electoral considerations.

That said, members of the former ruling party will hardly be enthusiasticsupporters of the new president’s anti-corruption drive. Mr Chen’s reforms willcut into the KMT’s underlying power base—possible legislation to cut linksbetween political parties and business, for example, would deal a major blow tothe KMT (the former ruling party controls a commercial empire estimated to beworth as much as NT$600bn—US$19.5bn). A coalition government is also adifficult business at the best of times, and is unprecedented in Taiwan. Giventhe backgrounds of the president and prime minister, differences of opinionbetween the two men are inevitable. Mr Chen has taken some steps to makethe new government non-partisan: most members of his administration arenot affiliated with any political party; the new president has promised togovern for the people rather than for the DPP; and members of the KMT wereinvited to join his cabinet as individuals rather than as a party bloc. But despitethese considerations, the risk remains that the new government will becomedivided along party lines. The DPP chairman, Lin Yi-hsiung, has already saidthat the cabinet must abide by the party’s most important political principles,such as opposition to nuclear power and to policies aimed at achievingTaiwan’s reunification with the mainland (the DPP’s charter calls for theestablishment of an independent Republic of Taiwan). Partisan divisions in thecabinet would severely constrain Mr Chen’s ability to govern effectively.

Cross-Strait contacts are likely to resume in 2000-01. Relations between Chinaand Taiwan seem to have improved in recent weeks. Mr Chen has in recentmonths greatly toned down the DPP’s pro-independence stance. He has said,for example, that in the absence of a mainland invasion the new governmentwill not seek to change Taiwan’s official name from the “Republic of China”; inaddition the new head of Taiwan’s Mainland Affairs Council (MAC), Tsai Ying-wen, has stated that Mr Chen’s government will not use the “state-to-state”

Domestic politics

International relations

8 Taiwan


definition of cross-Strait relations that was promoted by the previous president,Lee Teng-hui, and that is anathema to mainland China. For its part theauthorities in Beijing have modified their cherished “One China” principlefrom a political to a geographical description, thereby making it less dis-agreeable for Taiwan’s government.

These factors may allow negotiations between China and Taiwan, which werebroken off by the government in Beijing when Mr Lee unveiled the “state-to-state” definition in July 1999, to resume. However, although the re-establishment of contacts between China and Taiwan would undoubtedly easetensions in the short term, it remains difficult to see how such talks would putthe relationship between China and Taiwan on a firmer footing in the longerterm. Mr Chen has said he wishes to strengthen economic links between thetwo sides, but the incoming president has neither the personal desire nor thepolitical mandate to give ground on the mainland’s main demand—reunification. Relations between China and Taiwan are therefore likely toremain tense throughout the forecast period.

Economic policy outlook

The new president has pledged that in broad terms he will maintain theapproach to the economy pursued by the former KMT government, which wasfocused on achieving rapid rates of GDP growth—mainly through thedevelopment of a vibrant export-oriented manufacturing sector—andmacroeconomic stability. Mr Chen has also promised to continue with effortsmade by the last government to improve the efficiency of the domesticeconomy. The new administration will therefore honour the wide-rangingmarket-opening commitments that were made by Mr Lee's government in anattempt to secure membership of the World Trade Organisation (WTO). Someof these market-opening measures have already been implemented. Theremainder are likely to be introduced during the forecast period, when Taiwanis finally expected to accede to the trade body.

It is even possible that the deregulation of the economy will accelerate underthe new administration. Such liberalisation, after all, will be the inevitableconsequence of policies aimed at cutting ties between business and govern-ment. In addition, Mr Chen seems to have a principled attachment toeconomic liberalisation: before the election he talked of the need to respectmarket forces. However, despite these considerations, it is not yet clear that thenew government will be any more keen on the unfettered operation of marketforces than was the previous administration. All three of the administration’smain economic officials are KMT members, and the new government hasalready backed away from Mr Chen’s pre-election pledges to speed up liberal-isation of portfolio flows in Taiwan.

The budget deficit, which surged from 3.4% of GDP in 1998 to 5.9% in 1999, isexpected to narrow during the forecast period as recurrent revenue is boostedby more rapid rates of GDP growth. The deficit is unlikely to fall very far,however. The increase in the deficit in 1999 was largely the result of spending

Policy trends

Fiscal policy

Taiwan 9


necessitated by the devastating earthquake that hit Taiwan on September 21st1999, and the need to rebuild infrastructure damaged by this quake willcontinue to push up government expenditure in 2000. In addition, during theelection campaign Mr Chen unveiled ambitious expenditure proposals,including a so-called 3-3-3 plan. Under this scheme the government willprovide a NT$3,000 (US$98) monthly payment to every member of thepopulation over the age of 65, home loans with an interest rate of just 3% forfirst-time young home-buyers, and free medical care for all children under theage of three. Speaking of the 3-3-3 plan the new finance minister, Shea Jia-dong, said that Mr Chen “may not have had enough time to calculate thescheme’s cost efficiency when he proposed it”.

Mr Shea believes that the government has some room to increase taxes: taxrevenue as a proportion of GNP declined from 18.1% in 1995 to just 14.7% in1999. Mr Chen, however, has ruled out raising taxes during his first four-yearterm as president. The new president has said that his government will insteadimprove the fiscal balance by improving efficiency in government revenuecollection and expenditure, for example by cracking down on corruption whengovernment contracts are awarded. It is likely to be some time before such anapproach leads to any significant improvement in the health of the govern-ment’s finances.

Economic forecast

Forecast summary(% unless otherwise indicated)

1998a 1999a 2000b 2001b

Real GDP growth 4.6 5.7 6.8 6.3

Industrial production growth 2.6 7.7 8.0 7.5

Unemployment rate (av) 2.7 2.9 2.8 2.7

Consumer price inflation

Average 1.7 0.2 1.9 2.5

Year-end 2.1 0.1 2.0 2.8

Short-term interbank rate 7.9 7.7 7.9 8.3

Government balance (% of GDP) –3.4 –5.9 –4.8 –4.3

Exports of goods fob (US$ bn) 110.2 121.1 134.5 144.1

Imports of goods fob (US$ bn) –99.9 –106.1 –122.5 –133.7

Current-account balance (US$ bn) 3.4 5.8 3.1 2.1 % of GDP 1.3 2.0 0.9 0.6

Total foreign debt (year-end; US$ bn) 30.0 31.5c 35.7 40.7

Exchange rates (av) NT$:US$ 33.46 32.27 30.90 28.92 NT$:¥100 25.56 28.33 28.74 27.54 NT$:€d 29.87 30.25 31.13 26.53

a Actual.

b EIU forecasts.

c EIU estimate. d Ecu before 1999.

Although remaining robust, import growth in Taiwan’s major export markets isexpected to slow during the forecast period. On a weighted basis, merchandise

International assumptions

10 Taiwan


import growth in Taiwan’s 11 major export markets, which grew by 10.8% in1999, is expected to expand by 10% in 2000, and by 8.7% in 2001. Importgrowth in Taiwan’s major export markets could slow further than the EIU iscurrently forecasting. Much will depend on the US, which in 1999 was thedestination for 25.4% of Taiwan’s merchandise exports. Since June last year theUS central bank, the Federal Reserve, has been tightening US monetary policyin an attempt to engineer a soft landing of an economy that is currentlygrowing at an unsustainable rate. The Federal Reserve has already raised itsbenchmark rate by 175 basis points, and we expect its funds rate to beincreased by a further 50 points by August 2000. But US rates may yet have torise further than we are currently assuming—after all, even with these tightermonetary conditions, the US economy is still expected to expand by anextremely rapid 5.1% in 2000. Given the imbalances in the US economy, suchas a widening current-account deficit, further increases in interest rates couldtrigger a hard landing in the US economy. Such a US recession would deal amajor blow to external demand for Taiwan’s exports.

International assumptions summary(% unless otherwise indicated)

1998 1999 2000 2001

GDP growthUS 4.3 4.2 5.1 3.1OECD 2.4 2.9 3.7 2.8EU 2.7 2.2 3.1 2.8

Exchange rates (av)US$ effective (1990=100) 119.3 116.3 118.9 114.5¥:US$ 130.9 113.9 107.5 105.0US$:€

a1.12 1.07 0.93 1.00

Financial indicatorsUS$ 3-month commercial paper rate 5.3 5.2 6.5 6.6¥ 2-month private bill rate 0.7 0.3 0.1 0.6

Commodity pricesOil (Brent; US$/b) 12.8 17.9 24.5 20.0Gold (US$/troy oz) 294.1 278.8 290.0 300.0Food, feedstuffs & beverages (% change in US$ terms) -13.9 -18.6 -2.1 4.9Industrial raw materials (% change in US$ terms) -19.6 -4.3 16.2 9.9

a Ecu before 1999.

We expect Taiwan’s economy, which grew by 5.7% in 1999, to expand by 6.8%in 2000 and by 6.3% in 2001. The increase in GDP growth will primarily reflecta recovery in domestic demand growth. Private consumption, which grew by5.7% in 1999, is expected to grow by 6.5% in 2000 and by 6.7% in 2001. Grossfixed investment growth will pick up even more strongly during the forecastperiod: after expanding by 2.2% in 1999, gross fixed investment will expand byan average of 10.8% a year in 2000-01. Government-inspired projects will playa part in this robust investment growth: construction of the long-delayedNT$400bn Taipei-Kaohsiung high-speed rail link may begin in 2000 (this linkis being built by the Taiwan High-Speed Rail Corporation on a build-operate-transfer basis). More important in the recovery in overall gross fixed

Economic growth

Taiwan 11


investment growth, however, will be capital expenditure by the island’s privatesector. The high sales growth achieved by many firms in recent months willprompt capacity-increasing investment in 2000-01. Private-sector investmentgrowth will be increased further by electronics companies upgrading theirproduction facilities to enable them to supply higher-specification products.

Strengthening domestic demand growth will lift demand for imports. Importgrowth will be boosted further by the market-opening measures that will beimplemented when Taiwan joins the World Trade Organisation (WTO).Imports of goods and services, which grew by 4.4% in 1999, are expected toexpand by 9.5% in 2000 and by 8.6% in 2001. Exports of goods and serviceswill grow by 10.2% in 2000 and by 8.3% in 2001: although slowing from 1999,external demand growth is expected to remain robust during the forecastperiod.

Gross domestic product by expenditure(NT$ m at constant 1991 prices; % change year on year in brackets unless otherwise indicated)

1998a 1999a 2000b 2001b

Private consumption 5,187.4 5,484.0 5,840.5 6,231.8(6.5) (5.7) (6.5) (6.7)

Public consumption 1,210.0 1,134.0 1,168.1 1,191.4(4.1) (–6.3) (3.0) (2.0)

Gross fixed investment 2,064.4 2,110.7 2,354.8 2,590.0(8.0) (2.2) (11.6) (10.0)

Final domestic demand 8,461.8 8,728.8 9,363.3 10,013.2(6.5) (3.2) (7.3) (6.9)

Stockbuilding 126.5 134.8 65.0 20.0(0.0)

c(0.1)

c(–0.8)

c(–0.5)

c

Total domestic demand 8,588.3 8,863.5 9,428.3 10,033.2(6.5) (3.2) (6.4) (6.4)

Exports of goods & services 4,066.1 4,455.9 4,912.0 5,318.4(2.4) (9.6) (10.2) (8.3)

Imports of goods & services –4,089.3 –4,268.6 –4,674.1 –5,076.1(6.3) (4.4) (9.5) (8.6)

Foreign balance –23.2 187.4 237.9 242.3(–1.8)

c(2.5)

c(0.6)

c(0.0)

c

GDP 8,565.1 9,050.9 9,666.2 10,275.5(4.6) (5.7) (6.8) (6.3)

a Actual.

b EIU forecasts.

c Change as a percentage of GDP in the previous year.

As measured by the rate of change of the consumer price index (CPI), inflationin Taiwan, at 0.2% in 1999, averaged 0.9% year on year in the first fourmonths of 2000. Prices have been pushed up by strengthening domesticdemand growth and firming world commodity prices. These factors willcontinue to exert upward pressure on prices during the remainder of theforecast period. Inflation in Taiwan will, however, remain moderate in 2000-01, averaging 2.2% a year. The inflationary pressures that do arise during thenext two years will be offset by the tighter monetary conditions that will beintroduced by Taiwan’s central bank, the Central Bank of China (CBC).Inflation in 2000-01 will be further restrained by official attempts to enhancethe efficiency of the domestic economy.

Inflation

12 Taiwan


The New Taiwan dollar will appreciate from an average of NT$32.27:US$1 in1999 to NT$28.92:US$1 in 2001. This change will be partly the result of anexpected strengthening of the yen against the US dollar (the NT$:US$exchange rate often moves loosely in line with changes in the ¥:US$ rate). Theincrease in the value of the currency will also be due to the inflows of capitalexpected in 2000-01. Robust export growth will result in the current accountremaining in surplus during the next two years. Strong inflows of portfolioinvestment are also expected in 2000-01, encouraged both by the robustearnings growth that Taiwan’s listed firms are likely to record, and by an easingof current restrictions on foreign investment in the stockmarket.

Taiwan’s current-account surplus will fall from US$5.8bn (2% of GDP) in 1999to US$2.1bn (0.6% of GDP) in 2001. Although merchandise export growth willbe robust in 2000-01, imports of goods will grow more strongly, boosted bystrengthening domestic demand growth and the implementation of market-opening measures associated with Taiwan’s bid to join the WTO. Themerchandise trade surplus will consequently narrow from US$15bn in 1999 toUS$10.4bn in 2001. Strong demand for trade-related services and increasingoverseas travel by Taiwan residents will cause the services deficit to widen fromUS$9.7bn in 1999 to US$10.5bn in 2001. The deterioration in the trade andincome and services balances will more than offset an improvement in theincome surplus. In an attempt to avoid rising domestic costs of production,local firms will continue to move lower-end manufacturing capacity offshoreduring the forecast period, and so the island’s income surplus will widen fromUS$2.7bn in 1999 to US$3.1bn in 2001.

External sector

Exchange rates

Taiwan 13


The political scene

On March 18th Taiwan’s voters elected the candidate of the DemocraticProgressive Party (DPP), Chen Shui-bian, as their next president. Mr Chen’svictory was hardly sweeping. The candidate of the island’s main oppositiongroup won just 39.3% of the vote, compared with the 54% that the outgoinghead of state, Lee Teng-hui, had secured in the last presidential election in1996. Moreover, Mr Chen’s victory in the election owed more to a split in thevote for the Kuomintang (KMT) than to a surge in support for the DPP.Although only 23.1% of the electorate voted for the KMT’s official candidate inthe election, Lien Chan, over 36% cast their ballots in favour of a politicianclosely associated with the party, James Soong. Mr Soong, who was at one timea close colleague of Mr Lee, had fallen out with the president in recent years,and so was unable to gain official KMT backing to contest the election.Mr Soong therefore stood as an independent.

Despite the circumstances of his victory, the March poll has huge significancefor the political scene in Taiwan. This is because of both the election of a non-KMT politician as head of state, and the blow dealt to the former ruling partyby Mr Lien’s defeat. The implications have already begun to be felt, withMr Chen taking the unprecedented step of forming a coalition government.Mr Chen’s first prime minister is the life-long KMT member and minister ofdefence in the outgoing government, Tang Fei. Altogether ten out of a total of38 cabinet positions have been filled by members of the KMT; only eightmembers of the new cabinet are DPP members, with the remainder of theappointees being non-partisan.

Taiwan’s new government

Premier: Tang Fei (KMT)

Vice-premier: Yu Shyi-kun (DPP)

Minister without portfolio: Lin Neng-pai

Minister without portfolio: Huang Jong-tsun

Minister without portfolio: Chen Chin-huang

Minister without portfolio: Chang Yu-huei (KMT)

Minister without portfolio: Tsay Ching-yen (KMT)

Minister without portfolio: Hu Ching-piao (KMT)

Cabinet secretary-general: Wea Chi-lin (KMT)

Minister of interior: Chang Po-ya

Minister of foreign affairs: Tien Hung-mao

Minister of national defence: Wu Shih-wen (KMT)

Minister of finance: Shea Jia-dong (KMT)

Minister of education: Ovid Tzeng

Minister of justice: Chen Ding-nan (DPP)

Minister of economic affairs: Lin Hsin-i

Minister of transportation & communications: Yeh Chu-lang (DPP)

Chen Shui-bian becomespresident

14 Taiwan


Chairman, Mongolian and Tibetan Affairs Commission: Hsu Cheng-kuang

Minister, Overseas Chinese Affairs Commission: Chang Fu-mei (DPP)

Governor, Central Bank of China: Penang Fai-nan (KMT)

Director-General, Directorate-General of Budget, Accounting and Statistics: Lin Chuan

Director-General, Central Personnel Administration: Chu Wu-hsien

Director-General, Government Information Office: Chung Chin

Minister of health: Lee Ming-liang

Administrator, Environmental Protection Administration: Lin Jun-yi

Director, National Palace Museum: Tu Cheng-sheng

Chairwoman, Mainland Affairs Council: Tsai Ing-wen

Chairman, Council for Economic Planning and Development: Chen Po-chih

Chairman, Vocational Assistance Commission for Retired Servicemen: Yang Te-chih (KMT)

Chairwoman, National Youth Commission: Lin Fang-mei

Chairman, Atomic Energy Council: Hsia Der-yu (KMT)

Chairman, National Science Council: Weng Cheng-I

Chairman, Research, Development and Evaluation Commission: Lin Chia-cheng (DPP)

Chairman, Council of Agriculture: Chen Hsi-huang

Chairwoman, Council of Cultural Affairs: Tchen Yu-chiou

Chairwoman, Council of Labor Affairs: Chen Chu (DPP)

Chairman, Consumer Protection Commission: Yu Shyi-kun (DPP)

Chairman, Public Construction Commission: Lin Neng-pai

Chairman, Council of Aboriginal Affairs: Isqaqavut Yohani (Sung Kuo-hsien—DPP)

Chairman, National Sports Council: Hsu Ii-hsiung

Chairwoman, Fair Trade Commission: Chao Yang-ching (KMT)

Director-General, Coast Guard Administration: Wang Chun (KMT)

Taiwan provincial governor: Chang Po-ya

Fukien provincial governor: Yen Chung-cheng (KMT)

Mr Chen’s pre-election pledge to form a “cabinet for the people” was onefactor behind his success in March. As the DPP had never before controlledTaiwan’s government, Mr Chen was vulnerable to KMT charges that hisadministration would suffer from a lack of experience—promising to reappointlong-serving KMT officials was a useful way of rebutting such attacks. Beforethe election the KMT had also sought to weaken support for Mr Chen byplaying up the DPP’s perceived “radicalism”—in its policy platform the DPPcalled for the establishment of an independent Republic of Taiwan, and theparty has also been closely associated with promotion of green issues. Pledgingto appoint non-DPP figures to the cabinet has weakened the effectiveness ofthese attacks: a coalition government, after all, militates against radicalism.

However, although helping to build support in the run-up to the election,Mr Chen’s promise to form a coalition government was also a reflection ofpolitical realities in Taiwan. His victory in the presidential race did not destroy

A coalition government isformed

Taiwan 15


the influence the KMT enjoys within Taiwan’s other major institutions. TheKMT, for example, controls a slim majority in Taiwan’s legislature, theLegislative Yuan. In addition, and although the risk of a coup is negligible, theisland’s armed forces, particularly the army, have traditionally been both loyalto the KMT and committed to the cause of unification with China. Mediareports suggested that in the aftermath of the election a group of army generalsobjected to having to pledge loyalty to a pro-independence president.Appointing non-DPP officials to his cabinet was therefore essential if Mr Chenwas to govern effectively: officials from the former ruling party are more likelyto be able to win approval for legislation within the KMT-controlled LegislativeYuan. Appointing Mr Tang as prime minister and promoting the deputydefence minister of the outgoing government, Wu Shih-wen, to defenceminister, would help to ensure the loyalty of the armed forces.

In his attempt to build “a government for all the people”, Mr Chen hasreached out to other constituencies in Taiwan. Seven members of the newcabinet are “mainlanders”. Mr Chen has also established links with the islandsbusinesses Shortly after his election in March the incoming president formed aNational Policy Advisory Group (NPAG) to help him choose a prime minister.This ad hoc group included seven prominent business leaders, such as the headof the Evergreen group, Chang Yung-fa, the general manager of ContinentalEngineering, Nita Ing, and the chairman of the island’s largest computer firm,Acer. Although the NPAG was disbanded on April 13th, the businesscommunity is still represented in Mr Chen’s government: the new minister foreconomic affairs, Li Hsin-yi, was the vice-chairman of China Motor.

Mr Chen’s government is not a formal coalition between the KMT and theDPP. The incoming president did not form his cabinet through party-to-partydiscussions with the KMT. Instead, members of the former ruling party wereinvited to serve in the government as individuals. This irritated the KMT, butthe party agreed to allow its members to serve in the new administration aslong as they did not do so as official representatives of the KMT. That Mr Chenwas keen to avoid party-to-party discussions is not surprising, given that theKMT would have used such negotiations to demand greater influence in thenew government. Appointing KMT members as individuals rather than as aparty bloc allowed Mr Chen to maintain the perception that the newadministration was DPP-led. In addition, by avoiding a formal coalition withthe KMT, Mr Chen may have eased the risks of his cabinet becoming dividedalong party lines.

It is easy to understand why the KMT did not insist on party-to-partynegotiations. The party, which had already suffered a humiliating electiondefeat, would have suffered a further drop in popularity if it had beenperceived to be interfering with the formation of the new government. In anycase, Mr Chen’s victory caused turmoil within the KMT. As a result, even if theformer ruling party had wanted to interfere with the formation of the newgovernment, it was not in a strong position to do so. Taking the blame for theelection defeat, Mr Lee, who had ruled the KMT in authoritarian stylethroughout the 1990s, announced on March 19th that he would resign asparty chairman at an extraordinary session of the KMT's national congress in

Mr Chen’s victory causedturmoil within the KMT

16 Taiwan


September. Shortly after this announcement, however, Mr Lee said that hewould step down with immediate effect. Mr Lee’s change of mind followed avocal campaign for his removal, led by supporters of the KMT’s formersecretary-general, Mr Soong. Critics claimed that Mr Lee's preference for thedull Mr Lien had prevented the party uniting around the more charismaticMr Soong, and had therefore led to the KMT’s loss of the presidency.

Even though the KMT’s defeat was not due to a surge in support for the DPP,the former ruling party has decided that structural reforms are necessary for itselectoral prospects to improve in the future. Shortly after Mr Lee’s resignation,a 54-member reform council was established. Council officials have beenconsulting with party members in order to submit a reform agenda to anextraordinary session of the KMT national congress, which is to be held onJune 17th-18th. In line with the changes proposed by Mr Lien before thepresidential election to scale down the KMT’s business empire (1st quarter2000, page 14), the party’s business management committee has alreadyproposed merging its seven holding companies into just three, and hasinvestigated placing the party’s assets into investment trusts. Reforms that maybe proposed by the reform council in June include direct election by partymembers of the KMT’s chairperson, and the insertion of an article in theparty’s charter outlawing political corruption; Mr Lee has even suggested thatthe party consider changing its name.

Despite these reforms, it is not quite “all change” at the KMT. FollowingMr Lee’s resignation Mr Lien became the party’s acting chairman. Mr Lienwould probably be punished for his central role in the party’s disastrous Marchelection showing had the party’s chairman been directly elected by allmembers. Any changes in internal KMT election arrangements will, however,take time to implement. In the absence of such changes, only thoserepresentatives who attend the national congress will be entitled to vote in theleadership ballot in June. This may allow Mr Lien to remain KMT chairman. Inaddition, party leaders have made little attempt to heal the internal rift createdby Mr Soong’s decision to stand as an independent candidate in March. Beforethe election the KMT threw out almost 50 members—including sevenlegislators—for supporting Mr Soong rather than Mr Lien. On April 7th theparty announced that a further 53 officials were being expelled for the sameoffence.

Superficially, it may seem surprising that expulsions from the KMT havecontinued. The election is, after all, now concluded. In addition, given MrSoong’s strong performance in the March election, it would seem sensible forthe KMT to work to bring him back into the party. But such considerations arecurrently outweighed by other factors. Mr Soong’s decision to pursue anindependent bid for the presidency has created considerable antipathy towardshim from within the former ruling party (many officials in the KMT have, afterall, been chosen either by Mr Lee or by his supporters). Reforms of the partywill dilute Mr Lee’s influence only slowly, and so the KMT seems unlikely toforgive Mr Soong any time soon. Mr Soong has also ruled out seeking to rejointhe KMT, and has instead established his own party, the People First Party(PFP). The formation of the PFP appears, at least for now, to have

Mr Soong forms the PeopleFirst Party

Taiwan 17


institutionalised the split between Mr Soong and the KMT, with at least 18legislators leaving the former ruling party to join the PFP.

The formation of the PFP is not the first time that the KMT has split. In August1993 several leading members of the KMT, dissatisfied with Mr Lee’s“Taiwanisation” of the then ruling party, broke away to form the New Party(NP). After creating quite a stir when it was first formed, the NP has since fadedaway—the party’s presidential candidate, Li Ao, secured just 0.1% of the votein March. Despite the PFP’s early success in attracting some legislators from theKMT, Mr Soong will face a difficult task in making the PFP more durable thanthe NP has proved to be. It will not be easy for the PFP to win support awayfrom Taiwan’s two largest parties. The DPP, after all, now controls the island’shighest political office, and despite the inner-party turmoil that has resultedfrom the loss of the presidency, the KMT—which is one of the richest politicalorganisations in the world—remains a major player.

That said, a recent decision by Taiwan’s highest judicial body, the Council ofGrand Justices, almost gave the PFP the opportunity to emerge as a seriouspolitical force on the island. On March 24th the council ruled that constit-utional amendments passed by the National Assembly in September last year(4th quarter 1999, pages 12-13) were invalid. These amendments extended theterm of the current Assembly until June 2002, and replaced direct elections forthis institution with a system where seats would be allocated in proportion tothe number of votes won by each political party in the Legislative Yuan polls.The Council of Grand Justices argued that the use by Assembly deputies ofsecret ballots to introduce these changes broke transparency rules. The judgesalso said that the amendments were not compatible with the principle ofconstitutional democracy. The council therefore ruled that the term of thecurrent National Assembly should end as originally scheduled on May 19thand consequently that a new election should be held before that time.

Such an election would have allowed the PFP to capitalise on the electoralmomentum built up by Mr Soong in his unsuccessful bid for the presidency.The poll did not, however, take place. Although members of both the DPP andKMT in the NA had approved the September changes, the amendments wereopposed by the leaderships of both parties. The reason given by the DPPdeputies to the NA for supporting the September changes was that this wouldhave been a first step towards abolishing that institution—long a goal of theDPP. Mr Chen’s March victory gave the DPP the political resources to push forthe immediate dissolution of the NA. The KMT was not in a strong position tooppose such a change. The constitutional amendments passed in September1999 were widely perceived to be part of the corruption that is believed bymany voters to be endemic in Taiwanese politics. (Deputies to the NationalAssembly were considered to have voted to extend their term of office in orderto avoid facing re-election, and thereby continue to benefit from stipendswhich cost the government around US$2m a month.) The KMT’s past tolerancefor such corruption was the most important factor behind Mr Lien’s poorperformance in the March election. Opposing the DPP’s demands for abolitionof the NA, an institution that has been made increasingly superfluous by the

The National Assembly isall but abolished

18 Taiwan


growing influence of the Legislative Yuan, would only have made the formerruling party even more unpopular.

On April 24th the National Assembly passed constitutional amendmentschanging its status from a standing to an ad hoc body and transferring itspowers to propose changes to the constitution to the Legislative Yuan. TheAssembly will now convene only when it is required to vote on constitutionalrevisions proposed by the Legislative Yuan, on motions to impeach thepresident or vice-president, or on proposals to alter Taiwan’s territorialboundaries. When it is convened the Assembly will be constituted according tothe percentage of votes won by each party in the last Legislative Yuan election,and will only be in session for a maximum of one month at a time. Attemptsby some National Assembly deputies to dull the pain of this downsizing—bycreating potential alternative employment opportunities through an increasein the size of the Legislative Yuan, and by denying lifelong tenure to somegrand justices—did not succeed.

In the run-up to the March poll, Mr Chen pledged that, if elected, he wouldmake tackling corruption a top priority of his administration. In accordancewith this aim, at an informal meeting in mid-May the incoming cabinet agreedto establish an Anti-Corruption Administration (ACA). The new institution isto be modelled on Hong Kong’s Independent Commission Against Corruption(ICAC), and will be formed through the merger of the Ministry of Justice’sexisting Investigation Bureau and government’s Ethics Department. The ACAwill be more powerful than its predecessors—some officials in the newinstitution will have the power to search, seizure and arrest. In a furtherattempt to crackdown on corruption, the incoming cabinet agreed in May toabolish local-level elections, which have in the past been a hotbed for votebuying and gangster involvement (according to the then justice minister, LiaoCheng-hao, one-third of the candidates in the January 1998 local levelelections had gangland connections). Although as part of constitutionalchanges passed in 1997 the KMT had agreed to abolish these elections, it hadbeen reluctant to institute any change that would have undermined its power:the former ruling party won 49% of the local council seats and 55% of thetownship mayoralties in the January 1998 polls.

An important factor behind the DPP’s past failure to defeat the KMT innational elections was its apparent attachment to the cause of Taiwan’sindependence. Realising this, Mr Chen greatly moderated his mainlandpolicies in the run-up to the election, saying that he would only declareindependence in the event of a Chinese invasion of the island, and that hewould not change the island’s official name from the “Republic of China” tothe “Republic of Taiwan”. Mr Chen and the DPP have continued to appearmoderate since the March poll. In his acceptance speech on March 18th hedescribed his election as a victory for huaren, Chinese people, rather thanTaiwan ren, Taiwanese people. Shortly after the election a DPP legislator, ChenChao-nan, even proposed replacing the contentious “Republic of Taiwan”clause in the party’s political platform with a clause asserting that Taiwan isalready a “sovereign, independent country”.

Mr Chen seeks to endcorruption

The new government ismoderate on independence

Taiwan 19


The DPP’s Central Executive Committee postponed making a decision on the“Republic of Taiwan” clause, and instead referred it to the party’s policycommittee for further discussion. In some ways it is possible to imagine theparty abandoning this clause. It was not included in the party’s foundingplatform in 1986, only being added in 1991, and even then this provisionlacked unanimous support from party members. Having said this, it is by nomeans guaranteed that the party’s platform will be moderated in this way.Some elements of the party remain passionately attached to the cause ofindependence. Just over two years ago, in the aftermath of the DPP’s poorperformance in the December 1998 Legislative Yuan election, an attempt tomodify the “Republic of Taiwan” clause was rejected.

Given the intra-party contention that would be caused, it may be better for theDPP to leave the pro-independence clause alone. As a result of the Marchelection the performance of Mr Chen’s government will now play a muchmore important role than the party’s official charter in determining voterperception of the ability of the DPP to deal with mainland China.Abandonment of the pro-independence clause would also do little to improverelations between the Chinese government and the DPP-led administration.The Chinese government would rightly view any such change as largely asuperficial one, doing nothing to alter the party’s underlying desire forTaiwan’s self-determination, or the claims of Mr Chen’s government that theRepublic of China is already an independent state.

Mr Chen’s attempts to avoid provoking the government in Beijing have notprevented some upsets in cross-Strait relations in recent months. In April theChinese government issued an unprecedented warning that Taiwan businesseswould be prevented from operating on the mainland if they “openlyclamoured” for the island’s independence. Also in April, China reacted angrilyto an interview given to a Hong Kong television station by Mr Chen’s vicepresident, Annette Lu. In the discussion Ms Lu stated that while being closeneighbours, Taiwan and China were merely distant relatives. In doing so, MsLu challenged the mainland’s cherished “One China” principle. The mainlandgovernment reacted with the kind of vitriolic language that had previouslybeen reserved for the outgoing president, Mr Lee. Commentaries in officialnewspapers lambasted Ms Lu as being “the number-one scum of the Chinesenation”. Just before his inauguration on May 20th, Mr Chen appeared tonullify Ms Lu’s comments, saying that China and Taiwan were not distantrelatives at all, but rather like “brothers and sisters”.

While the pronouncements made by Chinese officials in April were clearlyaimed at putting pressure on the new government, they did not signal an endto the “wait and see” approach that the mainland government had adoptedfollowing Mr Chen’s election. In May the mainland authorities made someconcessions in Mr Chen’s favour. One of the sticking points in cross-Straitrelations in the past was the mainland’s insistence that Taiwan abide by the“One China” principle. From the mid-1990s this term has had three elements:that there is only one China; that Taiwan is part of China; and that the PRC isthe sole legitimate government representing the whole of China. Just beforeMr Chen’s inauguration on May 20th, however, commentaries in official

Cross-Strait relations mayimprove

20 Taiwan


Chinese newspapers defined the “One China” principle as meaning that“Taiwan is part of China, and China’s sovereignty and territorial integrity areinseparable”. On May 20th the PRC government further moderated its stance,suggesting that cross-Strait talks could begin if both sides expressed adherenceto their “one China in their own way”. These concessions are likely to allowtalks between China and Taiwan, which were broken off by the mainland in1999, to begin again at some point in 2000-01.

Economic policy

During the presidential election campaign the island’s new head of state, ChenShui-bian, pledged that he would not seek to implement a sea change in theconduct of economic policy in Taiwan. Mr Chen’s promise of broad continuityin to macroeconomic policy of the outgoing Kuomintang (KMT) governmentis not surprising. During its 55-year rule the KMT government had presidedover the transformation of Taiwan from a poor, agriculture-based economy toone in which standards of living have rapidly approached those found indeveloped-world levels. Voters would simply not have cast their ballots infavour of a candidate promising radical change from the economic policiesthat had been responsible for such prosperity.

Maintaining the broad thrust of economic policy does not mean, however, thatTaiwan’s economy will not change under the new DPP-led government.Although having grown rapidly in recent years, Taiwan’s economy is notwithout its problems: some areas of the economy suffer from over-regulationand excessive official intervention—in recent years the government hasrecorded persistent budget deficits—and financial scandals periodically hit thebanking sector. The outgoing government recognised that these problems didexist, and had started to tackle some of them. The KMT administration hadtried to make the economy more efficient, by opening up the domestic marketto greater foreign competition—through attempting to take Taiwan into theWorld Trade Organisation (WTO) and easing restrictions on foreign investmentin the domestic stockmarket—and undertaking a privatisation programme; theselling-off of state-owned enterprises offered the added advantage of boostinggovernment revenue.

Mr Chen has said he will honour WTO-related commitments made by theprevious government. Some of these commitments have already beenimplemented following the conclusion of a Sino-EU market-opening agree-ment on May 19th. The remainder are likely to be implemented in 2000-01.The agreement between China and the EU was important for Taiwan becausethe understanding reached—that Taiwan had been prevented from joining thetrade body before the accession of the mainland—has been reached under theauspices of the precursor to the WTO, the GATT. The Sino-EU agreementremoved one of the last outstanding issues in the mainland’s membership bid,thereby clearing the way for both China—and subsequently Taiwan—to jointhe WTO. Both are therefore likely to join during the forecast period, at thelatest in 2001 but possibly before the end of 2000.

Broad continuity ineconomic policy

Efforts to improveefficiency could accelerate

Taiwan 21


In addition to honouring the last government’s WTO commitments, the newadministration is unlikely to reverse its predecessor’s privatisation programme(although Mr Chen has pledged to review the divestiture plans). It is evenpossible that efforts to reduce government interference in the economy willspeed up under the new administration. Officials close to Mr Chen have saidthat they would like the National Stabilisation Fund (NSF), established by thelast government to support share prices in times of “economic and politicalcrisis”, to be used only sparingly; Mr Chen’s comments during the electioncampaign that the government should respect the operation of market forcessuggested that he will not seek to continue the KMT practice of talking up localshare prices. In the past Mr Chen has also talked of the benefits of the free flowof capital, and in the run-up to the election said he would remove allremaining restrictions on portfolio inflows by the end of June 2000. (Accordingto the schedule of the outgoing administration, foreign investment in thestockmarket would not have been liberalised until the beginning of 2001.)

Mr Chen has said that government involvement in the economy would fall asa matter of course if he was elected. Links between government and businesshave been strong in Taiwan largely because of the KMT’s control of a vastcommercial empire, estimated by some to be worth NT$600bn (US$19.5bn),and including majority stakes in at least 30 large firms and minority stakes in300 more. The KMT had ties to all three of the consortia that were awardedlicences in March to compete with the previous monopoly provider,Chunghwa Telecom, in providing fixed telecommunication network services(FTNS; see The domestic economy: Sectoral trends). Furthermore, it is possiblethat the strong links between the KMT and the business community were afactor behind the problems that have emerged recently in the local bankingindustry. The chairman of the troubled Chung Shing Bank, Wang Yu-yun, is aformer KMT Kaohsiung city mayor.

It remains to be seen how successful Mr Chen will be in cutting governmentinvolvement in the economy. All three of the main economic officials in theincoming administration have had long careers serving in the KMT-dominatedgovernment bureaucracy. Mr Chen has retained the existing governor of theCentral Bank of China (CBC, Taiwan’s central bank), Perng Fai-nan; the newfinance minister, Shea Jia-dong who was until recently Mr Perng’s deputygovernor; and the head of the Council for Economic Planning andDevelopment, Chen Po-Chih , an important economic adviser to the outgoingpresident, Mr Lee. It is not clear if these officials favour a rapid withdrawal ofthe state from the economy. Mr Perng has in the past won the epithet the“speculator terminator” as a result of his hardline stance towards speculatorson the New Taiwan dollar and, just after Mr Perng had become CBC governorin 1998, the central bank, in an attempt to bolster the local currency,introduced temporary restrictions on a type of derivative, non-deliverableforwards.

Early indications suggest that the new administration’s attitude to theoperation of market forces may not differ much from that of the outgoingadministration. Following a pre-inauguration meeting on May 14th, the newcabinet decided against speeding up measures to liberalise portfolio flows,

Cutting officialinvolvement will be hard

22 Taiwan


leaving the existing restrictions in place until early 2001. On May 24th officialssaid the new government was considering mobilising the NSF. The deputyfinance minister, Yen Ching-chang, claimed that such intervention wasjustified because on May 24th news had emerged that the Chinese military wasto hold artillery tests near one of Taiwan’s off-lying islands, Kinmen. The newsof these tests hit share prices hard in Taiwan: the benchmark Taiwan StockExchange Capitalisation Weighted Stock Index (Taiex) fell by 2% on the daynews of the tests was released. Official willingness to resort to the NSFsuggested, however, that the government is not as pro-market as it had initiallyappeared to be. The tests, after all, did not seem to constitute a time of“political” crisis: they were described by Taiwan’s minister of national defence,Wu Shih-wen, as being merely routine. (Citing Mr Wu’s assessment, thegovernment eventually backed away from mobilising the NSF. But it did notrule out intervening in the market in the future.)

Even before news of the mainland’s military exercises became known, shareprices in Taiwan had already fallen, dragged down in part by problems in thelocal banking sector (see Financial indicators). After Mr Chen was elected inMarch two local financial institutions, Ching Shing bank and the TaiwanDevelopment and Trust Company, suffered runs on deposits. When theproblems at Chung Shing emerged in late April, the then finance minister-designate, Mr Shea, said that the incoming government could agree to itsliquidation. But on May 16th Mr Chen seemed to suggest that the newgovernment would take a softer line, saying: “my thinking is that if a financialinstitution can avoid going bankrupt, we should not let it go bankrupt”.

The president’s remarks do not necessarily indicate either a rift betweenMr Chen and his finance minister, or that the new government will not seek toinstil greater market discipline in the financial system. Mr Shea said that thegovernment should only refrain from rescuing a bank if such action “sparkeda crisis of confidence or increased systemic risks”. Reforming the financialsector is also a complicated business. In addition to undermining the localstock market, rapid restructuring of the domestic banking sector could cause acredit crunch, and so trigger broader problems in Taiwan’s corporate sector.

During the election campaign Mr Chen pledged to strengthen the CBC’sindependence, and introduce greater transparency of the bank’s activities, forexample by publishing minutes of bank meetings. The DPP candidate alsopromised that if elected, he would eliminate from the Central Bank of ChinaAct the need for the bank to “foster economic development”. The other threeobjectives of the bank, to promote financial stability, to guide sound bankingoperations, and to “maintain the stability of the internal and external value ofthe currency” would remain unchanged.

The CBC appears to be taking its role of maintaining the internal value of thecurrency increasingly seriously. Between September 1998 and February 1999, inan attempt to boost GDP growth which was at that time slowing, the CBCreduced its benchmark rediscount rate from 5.25% to 4.5%. On March 24ththe central bank began to tighten monetary policy once again, raising therediscount rate to 4.625%. This change was surprising: although GDP growth

The role of the CBC

Taiwan 23


in Taiwan had picked up sharply in the fourth quarter of 1999 and the firstquarter of 2000, the annual rate of inflation had not still not risen into singledigits by the end of March. On May 16th Mr Perng said that the CBC wouldcontinue to focus monetary policy on the need to keep consumer priceinflation low.

The new government became embroiled in an economic policy controversyeven before it took office—the future of the island’s fourth nuclear powerstation, the construction of which began in 1999. The DPP has long beenopposed to the use of nuclear power. But the new government appearsreluctant to abandon construction of the new plant. This is perhaps because ofa desire to increase the efficiency of government expenditure (Mr Chen haspledged not raise taxes during his first four-year term in office, saying insteadthat officials will reduce the government’s fiscal deficit—which surged to 5.9%of GDP in 1999—by improving collection of existing levies, and reducing wastein government expenditure.) Proponents of the plant say that cancellation ofthe project would be wasteful. Around NT$43bn (US$1.4bn) has already beenspent on construction, which is consequently 30% complete. Supporters of theproject argue that cancellation would cost NT$100bn directly, partly as a resultof compensation payments to firms which have been contracted to supplyequipment to the plant. A report produced recently by the Taiwan ResearchInstitute at the request of the Atomic Energy Council estimated that, includingthe expense of building a replacement power facility, the cost of cancellationwould be NT$400bn.

Officials from the state-owned company building the plant, Taiwan Power(Taipower), argue that the plant is needed to solve energy deficiencies inTaiwan. The industrial north is heavily dependent on power supplies from thesouth of the island. This deficiency was highlighted twice in 1999, first when alandslide in July destroyed a single pylon on one of the two north-south trunklines, causing short-lived power black-outs for 90% of the island (3rd quarter1999, pages 19-20), and later when last September’s devastating earthquakedamaged a transformer station at Chungliao in central Taiwan, causingelectricity shortages in the north which lasted until October 9th (4th quarter1999, pages 16-17). Furthermore, Taipower officials argue that a fourth nuclearplant in Kungliao in Taiwan’s northern Taipei county, will help to alleviate theproblems caused by the discrepancies in the geographical supply and demandfor power on the island. The company says that if the project is scrapped,Taiwan will suffer from power shortages after 2005.

Opponents of the plan have dismissed these arguments, saying that con-struction of new power thermal facilities will prevent Taiwan from sufferingfrom power shortages, even if the fourth nuclear plant is scrapped. The newgovernment has stalled in making a decision on the future of the plant. Thenew minister for economic affairs, Lin Hsin-i, has formed an ad hoc committeeto re-evaluate the project; this committee is expected to take four months toundertake its investigation.

In February the Ministry of Transport and Communications (MOTC) awardedtwo mobile phone operators, KG Telecom and Mobitai, licences to lease out

The fourth nuclear plant iscontroversial

More telecoms initiatives

24 Taiwan


excess capacity on their fibre optic networks. The government also opened upthe marine cable business, with MOTC officials saying that foreign companieswould be allowed to land cables in Taiwan. Also in February the cabinet gavefinal approval to a plan to allow foreign companies to take 60% stakes in localtelecommunications firms, up from just 20% previously.

In what would give a further boost to the market, MOTC officials in Aprilproposed that local firms manufacturing mobile phones, networks, fixed-wireless satellite and satellite communications should be defined as “newlyemerging strategic enterprises”. Such a designation would make thesecompanies eligible for tax incentives available under the government’s Statutefor Industrial Upgrading (1st quarter 1999, pages 20-21). Also in April theMOTC’s Directorate General of Telecommunications (DGT) announced theestablishment of a 40-member committee to study how to initiate third-generation (3G) mobile phone operations in Taiwan. The DGT plans to beginaccepting applications for 3G licences early next year, allowing such services tobe launched by the end of 2001. If the DGT sticks to this timetable, Taiwan’sgovernment will be one of the first in the region to initiate a 3G market.

On March 21st—just three days after Mr Chen’s election—the Legislative Yuanpassed an Offshore Islands Development Bill, clearing the way for the establish-ment of direct transport links between the mainland and Taiwan’s outlyingislands of Kinmen, Matsu and Penghu. In some ways this legislation was oflimited significance, merely legalising the direct trade that already occursbetween China and these islands (that such smuggling occurs is not surprising,given that these islands are very close to the mainland: Kinmen, for example, isjust 10 km away from the city of Xiamen in China). However, the bill could bethe harbinger of greater change: both before his election and since Mr Chenhas proposed easing the ban on direct mail, transport and trade links (the so-called three direct links) between China and Taiwan’s main island. Such achange would be a huge boon to Taiwan’s economy, but may still be some wayoff: the new president is unlikely to authorise even the gradual establishmentof these links until cross-Strait political relations are on a firmer footing.

The domestic economy

Output and demand

In the first three months of 2000 Taiwan’s GDP grew by 7.9% year on year.Growth was rapid partly due to comparison with a low base: as a result of theregional economic downturn, in the first quarter of 1999, Taiwan’s economyhad grown by just 4.2% year on year. The rapid GDP growth recorded in thefirst quarter of 2000 was, however, due to more than just technical factors.Growth in domestic demand strengthened in the first quarter of the year.Private consumption, which grew by just 5.7% in 1999 as a whole, expanded7.7% in the first quarter of 2000. Consumer sentiment strengthened in the firstquarter as the outlook for the island’s economy improved, and wage growth

GDP growth picks up

Direct cross-strait links?

Taiwan 25


accelerated (see Employment, wages and prices). Private consumption growthwas also boosted by spending related to the March 18th presidential election.

Gross domestic product by expenditure(% change, year on year; at 1991 prices)

1999 20001997 1998 1999 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr

Private consumption 7.3 6.5 5.7 5.2 6.5 6.0 5.3 7.67

Government consumption 5.9 4.1 –6.3 –1.0 –4.1 –4.2 –15.4 –7.13

Gross fixed capital formation 10.7 8.0 2.2 –2.2 1.2 0.0 8.1 8.19 of which: public –4.3 4.4 12.8 –0.1 19.0 26.5 8.3 –4 private 18.6 11.8 –0.6 –6.5 –6.9 –4.2 10.7 15.86

Exports of goods & services 9.1 2.4 9.6 8.8 9.2 3.6 16.6 12.83

Imports of goods & services 13.7 6.3 4.4 0.5 3.9 4.2 8.7 10.92

GDP 6.7 4.6 5.7 4.2 6.6 5.1 6.8 7.93

Source: Taiwan Government Statistics.

Gross fixed capital formation grew even more rapidly. After increasing by just2.2% in 1999 as a whole, gross fixed capital formation expanded by 8.2% yearon year in the first quarter of 2000. Investment growth was driven by private-sector capital expenditure, which surged by 15.9% year on year in the firstquarter. As with overall GDP, this strong growth was partly due a low base ofcomparison: private-sector investment spending had contracted by 6.5% yearon year in the first quarter of 1999. The rapid increase in private-sector grossfixed capital formation also reflected the strong sales growth which had beenachieved by many local firms in 1999, and which had prompted many localfirms to invest in order to increase capacity. Public-sector capital expenditure,meanwhile, contracted by 4% year on year in the first quarter of 2000. This fallwas a result of the ending of the government’s fiscal stimulus programme,which had been introduced in late 1998 and had focused on raising public-sector investment expenditure in order to boost overall GDP growth.

Strengthening domestic demand growth increased demand for imports.Imports of goods and services, which had grown by 4.4% in 1999 as a whole,expanded by 10.9% year on year in the first quarter of 2000. Import growthcontinued to be outpaced by export growth, however. Boosted both bystrengthening world import growth in general, and continued robust demandfor Taiwan’s high-tech products in particular, exports of goods and servicesgrew by 12.8% year on year in the first quarter of 2000.

Employment, wages and prices

Consistent with previous EIU forecasts, price pressures in Taiwan have begunto firm in recent months. As measured by the consumer price index (CPI),prices rose by just 0.1% year on year in the final four months of 1999, butincreased by 0.9% year in year in January-April 2000. The higher rate ofconsumer price inflation is partly the result of strengthening domestic demandgrowth, but strengthening world commodity prices have also played a part: the

Inflationary pressuresbuild

26 Taiwan


average oil price faced by consumers in Taiwan, for example, was 15.7% higherin the first four months of 2000 than it had been in the year-earlier period.

The rise in world commodity prices helps explain why import price inflationhas strengthened in recent months. In January-April 2000 import prices roseby an average of 4.3% year on year; in the same period of 1999, import priceshad fallen by 9.3% year in year. Import prices were higher in New Taiwandollar terms in January-April 2000 than they had been in the year-earlierperiod even though the local currency strengthened by 6% during theintervening months.

In addition to exerting upwards pressure on prices, the strengthening of GDPgrowth that has occurred almost continuously since the fourth quarter of 1998has also resulted in upward pressure on wages, and a decline in the unemploy-ment rate. Average monthly wages rose by just 1.2% year on year in the firstquarter of 1999, but surged by 7.1% in the final quarter of last year as verystrong external demand for Taiwan’s merchandise exports began to feedthrough into higher worker compensation. The average unemployment rate, at2.9% in the last three months of 1999, fell slightly to 2.8% in the first quarterof 2000.

The unemployment rate is likely to decline further during the remainder of2000 as domestic demand strengthens. Unemployment is, however, unlikely toreach the 1.6% average rate recorded in the early 1990s. In recent years Taiwanhas begun to suffer from structural unemployment (1st quarter 2000, pages24-25). This problem is likely to worsen if Taiwan, as expected, joins the WorldTrade Organisation (WTO) in late 2000 or early 2001. A professor at the LabourAffairs Institute of Taiwan’s National Chengchi University, Chen Chi-yue, hasestimated that the opening of Taiwan’s domestic market to greater foreigncompetition could cause employment in the agricultural sector to fall byalmost 10% in the first year after WTO entry, and by 5.9% and 6.6% in thetwo subsequent years. The news is not all bad: Mr Chen believes that WTOentry will result in more employment opportunities being created in Taiwan’stechnology-intensive export sector and in the transportation service sector.Some retraining of agricultural workers will, however, be necessary if they areto find new jobs in these sectors.

Prices(% change, year on year)

1999 20001997 1998 1999 Sep Oct Nov Dec Jan Feb Mar Apr

Consumer prices 0.9 1.7 0.2 0.6 0.4 –0.9 0.1 0.5 0.9 1.1 1.3

Wholesale prices –0.5 0.6 –4.5 –3.8 –0.5 1.1 2.2 1.2 0.9 0.9 1.1

Import prices –1.4 0.7 –4.1 –0.8 2.9 5.9 7.2 5.2 4.9 4.0 3.3

Export prices 2.1 5.6 –8.5 –9.1 –4.0 –2.1 –1.6 –3.5 –3.8 –4.0 –3.5

Source: Taiwan government.

Labour market conditionstighten

Taiwan 27


Wages and productivity(% change year on year unless otherwise indicated)

1998 19991997 1998 1999 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr

Average monthly earnings 4.6 2.8 3.4 1.3 –1.1 1.2 3.1 3.8 7.1

Labour productivity 7.0 4.4 7.1 5.0 4.9 7.8 9.4 5.7 5.3

Unit labour costs –2.6 0.5 –3.8 –2.1 –2.8 –4.9 –6.5 –0.7 –1.3

Source: Directorate-General of Budget, Accounting and Statistics, Quarterly National Economic Trends, Taiwan Area.

Unemployment(%)

1999 20001997 1998 1999 Sep Oct Nov Dec Jan Feb Mar

Unemployment rate 2.72 2.69 2.92 3.08 3.05 2.94 2.85 2.74 2.91 2.83

Source: Taiwan government.

Money supply(daily averages; % change year on year)


M1a 7.7 0.4 3.2 6.6 5.6 5.3 7.9 12.6 9.3 12.0

M1b 13.8 2.6 10.0 15.5 15.4 13.2 14.1 19.2 19.1 19.9

M2 8.3 8.8 8.3 8.1 7.6 6.7 7.1 8.3 8.3 8.2

Source: Central Bank of China.

According to figures from the Central Bank of China (CBC, Taiwan’s centralbank) growth in M1A, the narrowest measure of money supply, has picked upin recent months (M1A includes currency in circulation and current-accountand passbook deposits). M1A grew by an average of just 0.6% year on year inthe first six months of 1999, but expanded by 5.7% year on year in the last halfof the year, and by an average of 11.3% year on year in the first three quarter of2000. M1B, which, in addition to the constituents of M1A, includes passbooksavings deposits, has also grown rapidly in recent months, expanding by anaverage of 19.4% year on year in the first quarter of 2000. Growth in M2, the

Growth in narrow moneyincreases

28 Taiwan


broadest measure of money supply, has remained more stable, averaging 8.3%year on year in the first three months of 2000, the same average growth raterecorded in 1999 as a whole.

CBC officials attributed the acceleration in M1A and M1B growth toindividuals in Taiwan keeping a greater proportion of their assets in liquid formin order to be able to finance equity investments. Trading volume on the localstockmarket has certainly been heavy in the first few months of 2000:according to Taiwan’s Ministry of Finance (MOF), an average of 80bn shareswere traded a month in January-March 2000, compared with just 47.5bn amonth in the same period of 1999. Stock prices have, however, been volatile.After reaching a record high of 10,202 on February 17th, the benchmarkTaiwan Stock Exchange Capitalisation Weighted Stock Index (Taiex) fell to just8,536 a month later, dragged down by worries about political stability in therun-up to the presidential election on March 18th. The market recovered there-after to reach 10,128 on April 10th, but then fell once again, reaching just8,350 on May 11th.

A volatile stockmarket

Taiwan 29


The fall in local share prices in April-May was partly caused by global factors,namely a shift in global investor sentiment away from high-technology stocks.Taiwan’s stockmarket could not remain immune from the adverse effects ofthis shift. High-technology firms are well-represented on Taiwan’s benchmarkindex, with the electronics sector having a 57.6% weighting on TAIEX. Inaddition, Taiwan’s stockmarket has become increasingly internationalised inrecent years—accumulated net investment by qualified foreign institutionalinvestors in the stockmarket surged from US$9.4bn in 1998 to US$17.9bn in1999. As a result of these trends, the TAIEX now has an 80% correlation withthe world’s most prominent high-tech stock index, the US’s NASDAQComposite Index. Given that the Nasdaq composite index fell by 33% betweenMarch 27th and April 14th, it is not surprising that the TAIEX declined as well.

The stockmarket’s difficulties were also due to domestic factors, notably theemergence of a series of scandals in the domestic banking system. In late Aprilthe island’s main banking regulator, the MOF’s Bureau of Monetary Affairs(BMA), revealed that a month-long investigation of the Kaohsiung-basedChung Shing Commercial Bank had uncovered “the worst-ever lendingoperations to undermine the banking system in Taiwan”. The BMA found thatthe bank had made improper loans to Taiwan Pineapple, a company which hasmade losses for the past two years and shares ownership links with ChungShing. The BMA said that credit had been extended to Taiwan Pineapplewithout going through the bank’s usual loan approval process. (The bank’spresident, Wang Yu-yun, who resigned on April 26th, accused Chung Shing’schairman, Wang Shuen-ren, of extending loans to Taiwan Pineapple withoutthe approval of the bank’s board of directors; Wang Shuen-ren threw similarcharges back at the former president.)

The revelations, and Mr Wang’s resignation, triggered a run on Chung Shing,in which depositors withdrew NT$20bn (US$651m) in just four days. To ensurethe bank could meet this demand for funds, the CBC arranged for 15 otherbanks to buy NT$105bn worth of negotiable certificates of deposit from ChungShing. In an effort to restore confidence in the bank, officials from the govern-ment’s Central Deposit Insurance Company (CDIC) assumed management ofChung Shing for a period of six months.

In May the CDIC took over the management of another troubled institution,the Taiwan Development and Trust Company (TDTC). TDTC’s problems beganon May 12th when the institution’s management revealed it faced a shortfall ofNT$500m (US$16.3m) in operating funds. Unsurprisingly, a run on depositsensued. Shortly after the CDIC took control of the TCTC the Ministry ofJustice’s Bureau of Investigation charged five employees from the Bank ofTaiwan’s Taipei branch. These individuals were accused of stealing bonds andgovernment securities worth NT$1bn from clients, and then reselling them.

These difficulties are not the first time that the underlying health of thedomestic banking sector has come into question: in late 1998 and early 1999two local banks, the Medium Business Bank of Taichung and the Bank ofPanshin, suffered runs on deposits. But unhealthy links between banks andfirms in Taiwan may not be as strong as is suggested by the re-emergence of

Some banks run intodifficulties

30 Taiwan


these problems. On May 4th the MOF instructed 25 local commercial banks tostop issuing margin calls on troubled corporations, and to supply sufficientfunds to such firms to ensure stability in the stockmarket and the financialsector. The banks—which included Hua Nan Commercial Bank, Chang HuaCommercial Bank and the Bank of Taiwan—rejected this request, saying thatthey were not the “government’s vault”.

Any irritation felt by the outgoing government at the May 4th rejection wouldhave been offset by the announcement two days later that one of the world’slargest financial services organisations, Citigroup, and the local Fubon Group,were to form a strategic alliance. The partnership involves Citibank investingUS$750m to buy 15% stakes in each of Fubon’s five financial units, dealing inbanking, insurance, securities, life assurance and asset management. Thisannouncement marked the first major consolidation of the domestic bankingsector—Citibank already has a large retail presence in Taiwan. Officials in theprevious Kuomintang (KMT) government had been pressing for rationalisationof the overcrowded banking sector since early 1998, believing that such adevelopment would improve the health of individual financial institutions,and so prevent a repetition of the problems experienced in late 1998.

Given the current conditions in the domestic banking sector, consolidation isessential if bank profits are to rise. The past-due loan ratio, which had fallenfrom 5.1% at the end of the third quarter of 1999 to 4.9% at the end of theyear, rose once again to 5% at the end of March 2000. Bank profits willtherefore continue to be depressed in 2000 by the writing-off of overdue loans.The banking sector also continues to suffer from a liquidity overhang. Boostedboth by government borrowing to finance the National Stabilisation Fund, andby a recovery in private-sector investment growth, loan growth in Taiwan haspicked up in recent months. Deposit growth has also picked up, however,partly because of rising wages, and the liquidity ratio of the banking system hasconsequently increased, by 0.56 of a percentage point in February to 23.2%, an11-year high.

Banking statistics


Deposits and loans (% change, year on year)Deposits 8.3 8.6 8.3 8.0 7.3 6.8 8.2 8.5 8.5 8.8Loans 7.6 8.6 4.6 4.4 4.5 3.5 4.5 4.9 4.4 5.1 of which: claims on non- government entities 5.8 10.0 4.3 2.4 1.1 0.5 1.9 2.7 2.7 3.0

Interest rates (%)CBC rediscount rate 5.10 5.17 4.52 4.50 4.50 4.50 4.50 4.50 4.50 4.63Prime lending rate 7.4 7.9 7.7 7.7 7.7 7.7 7.7 7.7 7.7 7.7Overnight interbank rate 6.9 6.5 4.8 4.8 4.8 4.8 4.7 4.6 4.6 4.6


Citibank invests in Fubon

Taiwan 31


On April 18th the first “second category”—now known as Taiwan InnovativeGrowing Entrepreneurs (TIGER)—stocks were listed on Taiwan’s over-the-counter (OTC) market. The TIGER market has been established to allowcompanies that are too small or newly formed to list on the main board to gainaccess to the island’s capital markets. Firms wishing to list on the TIGER markettherefore need capitalisation of just NT$30m (US$977,000) and noaccumulated losses. If firms have suffered losses, they can still list if they havepaid-in capital of NT$2bn. Despite April’s downturn in investor sentimenttowards high-tech stocks, the market opened on a positive note: the shareprices of all three firms which christened the new market, Trade-van InfoServices, Infor pro Group and Yem Chio, rose on the first day of trading. Thechairman of Taiwan’s Securities and Futures Commission (SFC), Lin Tzong-yeong, estimates that between 50 and 100 firms could have listed on the TIGERmarket before the end of 2000.

In a further attempt to make itself the island’s equivalent of the US’s Nasdaq,the OTC market on May 22nd announced that it was changing its Englishname to Taisdaq. Despite the self-confidence suggested by this change,however, it is not clear for how much longer the OTC market will remain as anindependent entity. At the beginning of March the SFC indicated that itwanted the OTC market to merge with the island’s main board, the TaiwanStock Exchange (TWSE), by the end of 2002. SFC officials have said that nodetailed plan yet exists for this change. However, the authorities are alreadyencouraging 150 firms to move their listings from the OTC to the main board.The SFC is keen to increase the capitalisation of the TWSE in order to make theisland’s capital markets less vulnerable to shifting portfolio flows, which couldbecome more volatile as the government eases restrictions on foreigninvestment in the local stockmarket.

Developments on the OTCmarket

32 Taiwan


Sectoral trends

Manufacturing production(% change, year on year)

1999 20001997 1998 1999 Oct Nov Dec Jan Feb Mar

Manufacturing 8.7 2.4 8.1 8.6 12.7 12.1 13.1 15.4 11.7

Electrical & electronic machinery 19.2 10.0 19.8 16.2 25.4 26.1 28.9 24.6 19.6

Basic metal 20.5 3.4 6.8 6.8 4.4 5.9 1.3 13.8 4.8

Fabricated metal products 5.1 –2.6 2.9 5.5 2.9 3.4 7.6 7.7 2.6

Transport equipment 3.9 1.7 –7.1 4.2 –3.0 –2.6 –0.8 –6.1 11.8

Machinery & equipment 8.8 –5.5 2.1 –1.2 12.4 13.0 12.4 21.4 11.9

Plastic products 3.6 –5.9 6.0 8.4 6.9 8.8 7.9 9.4 6.2

Chemical materials 6.3 2.6 9.1 11.0 11.9 11.1 11.7 28.9 18.8

Food & beverages –8.2 –5.9 –1.6 4.5 3.3 0.8 2.0 –0.9 1.1

Textile mill products 3.6 1.5 2.8 3.2 7.7 4.9 6.9 18.3 5.2

Source: Ministry of Economic Affairs.

Manufacturing production growth in Taiwan picked up sharply in 1999: afterincreasing by just 2.4% in 1998, total manufacturing production expanded by8.1% last year. Output has continued to grow strongly this year: in the firstthree months of 2000 manufacturing production rose by an average of 13.5%year on year. Continuing the trend of recent years, growth in overallmanufacturing production has been led by the high-technology sector.Electrical and electrical machinery output, which has a 26.5% weighting onthe manufacturing production index, surged by 19.8% in 1999, and expandedby an average of 24.4% year on year in the first three months of 2000.Chemicals output also grew strongly last year, expanding by 11%. Outputgrowth in other sectors was more sluggish: the output of textile mill products,for example, rose by just 2.8% in 1999.

Output of the products that have traditionally formed the backbone ofTaiwan’s high-tech sector continued to grow strongly in 1999: production ofmotherboards, for example, expanded by 31.3%. But production of thosegoods that Taiwan firms have less of a track record in manufacturing alsosurged. According to Taiwan’s Ministry of Transport and Communications(MOTC), production of the island’s transport, warehousing and telecoms sectorgrew by 17.5% in 1999, exceeding growth in the output value of all othersectors. MOTC officials attributed this growth to the rapid expansion in thelocal telecoms industry: the output of which rose by 36.4% in 1999.Government figures show that local production of mobile phones alone surgedlast year from just 35,000 units worth a total of NT$190m (US$6.2bn) to 2.8munits worth NT$3.6bn.

Only three local firms were involved in the manufacture of mobile phones lastyear, including Acer Peripherals, a subsidiary of Taiwan’s largest producer of

Information technologyproduction surges

Firms diversify into thetelecoms sector

Taiwan 33


personal computers, Acer. Other computer manufacturers, such as CompalElectronics and Compaq, will diversify into the production of telecomsproducts in 2000. This will boost the production of mobile phones to 16.6munits in 2000. According to the Industrial Development Bureau (IDB) of theMinistry for Economic Affairs (MOEA) and the government’s MarketIntelligence Centre (MIC), production will rise to around 60m units by 2002,meaning more than 7% of the world’s mobile phones will in that year beproduced in Taiwan.

It is not surprising that mobile phone production is increasing so rapidly inTaiwan. The island’s manufacturing sector has a proven track record ofdiversifying into rapidly expanding and higher value-added markets. The creditfor this success does not just belong to the private sector. In the past, thegovernment has played an important part in initiating and facilitating thediversification: government-funded research and development (R&D) wasimportant in stimulating first growth of personal computer production andsubsequently the manufacture of semi-conductors on the island. Governmentpolicy has also been important in promoting the development of the telecomsindustry. The government already funds a research institute, the Computer andCommunications Research Laboratories (CCL), which is charged withdeveloping information, communications and digital video technologies inTaiwan. In May the MOTC announced that it would use NT$20bn (US$651m)to establish its own telecommunication technology centre in early 2001. TheMOTC plans to develop this institution from an accreditation centre fordomestically produced telecoms equipment into a telecom research centre. Inaddition, the MOEA, in co-operation with the Chung Shan Institute of Scienceand Technology, is investing NT$2.6bn to develop of code division multipleaccess (CDMA) technology.

Apart from the funding of these R&D activities, the government’s policy ofliberalising the domestic telecoms sector has also encouraged the developmentof the local telecoms industry. Before 1999 the government had alreadyliberalised the telecoms market twice. The second stage has resulted in thenumber of mobile telephone subscribers in Taiwan rising from 4.6m in 1998 to9.6m at the end of 1999. In March 2000 the telecoms market was liberalisedeven further. On March 19th the MOTC awarded licences to allow companiesother than the state-owned Chunghwa Telecom to provide fixed telecomm-unications network services (FTNS) in Taiwan. The MOTC awarded licences tothree of the four consortia which applied for them: Eastern BroadbandTelecom, New Century InfoComm and Taiwan Fixed Network Telecom (fordetails of the companies in each consortium, see 1st quarter 2000, page 31).Once the licensees have completed the installation of 150,000 service linesthey will be able to start providing local voice, data and leased-line services, aswell as domestic and international long-distance services.

The liberalisation of the FTNS market is likely to promote the furtherdevelopment of the local telecoms equipment manufacturing sector. Accordingto a Taiwan brokerage, Primasia Securities, each of the three winning consortiacould spend NT$80bn over the next five years in building up their networks.Taiwan’s only manufacturer of cable modems, Askey Computer, has already

Liberalisation of the FNTSsector

34 Taiwan


signed letters of intent to supply the three winning consortia with telecomsequipment. Other local firms will seek a role in meeting the surge in demandfor telecoms equipment.

Although relatively new to the manufacture of mobile phones, Taiwan firmsare already well-established in other areas of telecommunications. Localcompanies, for example, account for 50% of global Local Area Network (LAN)hardware production. On May 3rd, 14 local LAN manufacturers—includingcompanies such as Winbond Electronics and Lantech Computer—announced aplan to use Taiwan’s dominance of this industry to impose a new globalstandard for LAN technology. From next month these firms will ensure thattheir LAN equipment is compatible with the VF-45 plastic plug patented by theUS firm, 3M.

As a result of the limited bandwidth offered by copper LAN networks, demandfor the fibre-optic hardware produced by Taiwan’s firms was expected to growstrongly even before the VF-45 initiative was unveiled. As the plug greatlyreduces the cost of installing fibre optic, as opposed to copper, LANs, demandfor such equipment is now expected to rise even more sharply: the local firmsbelieve that by promoting VF-45 compatible equipment as the industrystandard, the percentage of households worldwide that are connected to fibre-optic networks will rise from only 10% in 2000 to 33% by 2010.

The establishment of this consortium is unusual in Taiwan’s high-tech sector,which has tended to be a follower of technology trends rather than trying toset those trends itself. But although Taiwan firms have had little experience asfirst-movers, it seems likely that the consortium will be successful inestablishing the VF-45 as the industry standard. The 14 founder members ofthe consortium together account for 25% of global production of LANhardware. Given this critical mass, it is likely that other local firms will seek tojoin the consortium—and with some urgency, given that the existing memberfirms have pledged to co-operate on the development of new products basedon the VF-45 standard.

The project to construct a high-speed rail link between the capital, Taipei, andthe southern city of Kaohsiung continues to proceed, albeit slowly. On April12th a ground-breaking ceremony was held for the first two sections of thenew line, between Panchiao via Taoyuan to Hsinchu County. In early May thecompany that won the contract to build the link, the Taiwan High-Speed RailCorporation (THSRC), announced that it had succeeded in raising its paid-incapital from NT$20bn to NT$30bn. Perhaps because of this success, THSRCannounced plans to raise its capital to NT$50bn by the end of June. Thecompany may now bring forward the date it plans to float on the localstockmarket, and may seek to list in late 2000.

The project has not proceeded entirely smoothly in recent months, however.THSRC will procure core railway systems and rolling stock from a group ofJapanese companies, the Taiwan Shinkansen Consortium (TSC). THSRC is touse export loans from Japan to pay for this equipment. The local firm,concerned about the volatility of the yen, has been hoping to secure a US

Local firms try to dictateLAN trends

The high-speed rail linkproceeds slowly

Taiwan 35


dollar-denominated loan; the Japanese financial institutions concerned wantthe loan to be denominated in yen. In an attempt to move the negotiationsalong Taiwan’s new president, Chen Shui-bian, in May urged the Japanesegovernment to show more interest in the project. It is unclear whetherMr Chen’s pleas, made to a Japanese legislator, will have much effect.Nevertheless the chairman of THSRC, Nita Ing, remains confident that therailway will be completed in 2005.

Foreign trade and payments

According to preliminary figures, Taiwan’s merchandise trade surplus morethan halved in the first four months of 2000 compared with the year-earlierperiod, narrowing from US$3.6bn to US$1.4bn. Exports of goods, whichexpanded by 9.9% in 1999, continued to grow strongly in the first part of2000: in January-April the US dollar value of Taiwan’s merchandise exports roseby 22.4% compared with the year-earlier period, to US$45.2bn. The value ofmerchandise imports grew even more quickly, however, rising by 31.2% toUS$43.7bn.

Foreign trade, Jan-Apr(US$ m unless otherwise indicated)

1999 2000 % change

Merchandise exports 36,909 45,162 22.4

Merchandise imports –33,313 –43,720 31.2

Trade balance 3,596 1,442 –59.9

Source: National Statistics of Taiwan, the Republic of China.

Exports of most categories of goods increased in the first four months of 2000compared with the year-earlier period. This suggests that the overall robustexport growth recorded in this period was at least partly due to a general pick-up in world demand growth, and in particular stronger growth in theeconomies worst affected by the regional downturn of 1997-98: total exports toIndonesia, Malaysia, Thailand and South Korea rose by 43% year on year in

The trade deficit shrinks

Taiwan 36


January-April 2000, and in the same period exports to Japan increased by39.9%. Taiwan’s strong export performance in the first four months of 2000was not just the result of cyclical factors, however. It was also due to continuedstrong global demand for goods made by Taiwan’s high-technology firms. In areflection of this, exports of machinery and electrical products accounted for54% of Taiwan’s total exports in the first four months of 2000, and in the sameperiod grew by 26.6% year on year. Export values of chemicals, base metals andof plastic and rubber articles all grew strongly in the first four months of 2000year on year.

Exports, Jan–Apr(US$ m; fob)

1999 2000 % change

Animals & animal products 320.6 355.4 10.9

Vegetable products 124.3 114.0 –8.3

Prepared food, beverages & tobacco 138.2 162.2 17.4

Chemicals 946.4 1,251.3 32.2

Plastic & rubber articles 2,246.6 2,798.3 24.6

Leather & fur products 382.6 371.7 –2.8

Wood & wood products 130.1 122.3 –6.0

Textiles & clothing 4,090.1 4,741.5 15.9

Footwear, headgear & umbrellas 341.1 320.8 –6.0

Stone, glass & ceramic products 296.6 308.7 4.1

Base metals & manufactures 3,649.3 4,409.7 20.8

Machinery & electrical equipment 19,371.9 24,522.6 26.6 of which: information & communication products 4,683.1 5,992.8 28.0

Cars, aircraft, ships & transport equipment 1,755.8 1,948.5 11.0

Optical, photographic, medical, precision equipment, clocks & watches 811.1 1,144.3 41.1

Toys, games & sports equipment 569.3 577.9 1.5

Others 1,734.6 2,012.9 16.0

Total 36,908.9 45,162.1 22.4

Source: Ministry of Finance, Preliminary Statistics of Exports and Imports.

As many of Taiwan’s high-tech firms rely on imports of machinery andcomponents, the strong import growth recorded in the first four months of2000 was partly to the result of the robust overseas demand for the island’sinformation technology products: in the first four months of 2000, imports ofcapital goods rose by 44.9% year on year, and imports of raw materials by31.7%. The effect on the value of merchandise imports of strengtheningdomestic investment growth was reinforced by rising world commodity prices:the value of imports of petroleum more than doubled in the first four monthsof 2000 compared with the year-earlier period. But strengthening privateconsumption growth has as yet had little affect on imports of consumer goods,the value of which fell by 1.8% year on year in the first four months of 2000.

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EIU Country Risk Service May 2000 © The Economist Intelligence Unit Limited 2000

Imports, Jan–Nov(US$ m; cif)

1999 2000 % change

Vegetable products 654.2 669.8 2.4

Prepared food, beverages & tobacco 690.7 740.9 7.3

Minerals 2,411.3 4,081.3 69.3 of which: crude petroleum 1,104.4 2,368.8 114.5

Chemicals 3,130.7 4,294.3 37.2

Plastic & rubber articles 905.4 1,154.9 27.6

Wood & wood products 334.1 411.7 23.2

Pulp, paper & printing products 593.2 695.3 17.2

Textiles & clothing 911.5 1,054.8 15.7

Precious stones, gold & jewellery 364.2 492.2 35.1

Base metals & manufactures 2,809.1 3,637.1 29.5

Machinery & electrical equipment 15,324.4 20,275.9 32.3

Cars, aircraft, ships & transport equipment 1,141.4 1,301.8 14.1

Optical, photographic, medical, precision equipment, clocks & watches 1,632.9 2,737.3 67.6

Others 2,409.6 2,172.4 –9.8

Total 33,312.7 43,719.7 31.2 Capital goods 8,147.4 11,804.8 44.9 Raw materials 21,478.2 28,293.5 31.7 Consumer goods 3,687.1 3,621.4 –1.8


Direction of trade, Jan–Apr(US$ m unless otherwise indicated)

Exports Imports % %

1999 2000 change 1999 2000 change Balance

US 9,574.4 10,684.3 11.6 5,891.0 7,543.3 28.0 3,141.0

Hong Kong 7,749.8 9,301.4 20.0 674.0 664.4 –1.4 8,637.0

Japan 3,564.4 4,985.8 39.9 9,154.3 12,450.5 36.0 –7,464.7

Netherlands 1,500.1 1,601.6 6.8 448.4 683.7 52.5 917.9

Germany 1,310.4 1,476.0 12.6 1,627.8 1,766.6 8.5 –290.6

Singapore 1,089.8 1,401.8 28.6 985.5 1,388.5 40.9 13.3

UK 1,134.1 1,422.0 25.4 568.2 597.5 5.2 824.5

Malaysia 811.2 1,099.4 35.5 1,195.5 1,750.5 46.4 –651.1

Philippines 777.7 965.6 24.2 640.4 1,017.7 58.9 –52.1

South Korea 734.4 1,203.5 63.9 2,181.2 2,906.2 33.2 –1,702.7

Thailand 660.1 792.1 20.0 738.1 896.2 21.4 –104.1

Australia 556.8 579.6 4.1 955.9 1,076.5 12.6 –496.9

Canada 544.2 607.0 11.5 351.8 418.3 18.9 188.7

France 486.0 554.2 14.0 699.8 537.1 –23.2 17.1

Italy 471.7 527.9 11.9 451.3 465.7 3.2 62.2

Indonesia 354.0 565.8 59.8 615.1 896.7 45.8 –330.9


Taiwan 38


On a balance-of-payments basis, the merchandise trade surplus narrowed by31.7% in the first quarter of 2000 compared with the year-earlier period, fallingfrom US$3.6bn to US$2.5bn. The services deficit also widened during thisperiod, from US$2bn to US$2.6bn. The widening of the services deficit waslargely due to individuals from Taiwan spending more on non-business tripsoverseas: debits incurred through personal visits abroad rose from US$1.1bn inthe first three months of 1999 to US$1.7bn in the same period of 2000. Thedeterioration in the merchandise trade and services balances more than offset aslight improvement in the income balance. As a result, the current-accountsurplus narrowed from US$2.1bn in the first three months of 1999 to justUS$485m in the same period of 2000.

Balance of payments(US$ m)

1999 20001997 1998 1999 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr

Goods: exports fob 121,725 110,178 121,119 27,641 29,503 30,086 33,889 32,731

Goods: imports fob –107,843 –99,862 –106,077 –24,023 –25,279 –26,246 –30,529 –30,259

Merchandise trade balance 13,882 10,316 15,042 3,618 4,224 3,840 3,360 2,472

Services: credit 17,144 16,768 14,659 3,750 3,342 3,843 3,724 3,856

Services: debit –24,888 –24,169 –24,405 –5,736 –5,885 –6,409 –6,375 –6,485

Services balance –7,744 –7,401 –9,746 –1,986 –2,543 –2,566 –2,651 –2,629

Income: credit 6,919 6,481 6,965 1,672 1,486 1,832 1,975 2,079

Income: debit –3,797 –4,432 –4,294 –840 –1,173 –1,407 –874 –997

Income balance 3,122 2,049 2,671 832 313 425 1,101 1,082

Current transfers: credit 2,898 2,943 3,126 732 719 729 946 834

Current transfers: debit –5,107 –4,470 –5,309 –1,135 –1,245 –1,607 –1,322 –1,274

Current transfers balance –2,209 –1,527 –2,183 –403 –526 –878 –376 –440

Current-account balance 7,051 3,437 5,784 2,061 1,468 821 1,434 485

Capital-account balance –314 –181 –173 –32 –39 –58 –44 –118

Financial account balance –7,291 2,495 11,820 2,085 3,065 2,742 3,928 6,539Direct investment –2,995 –3,614 –1,494 –368 –392 –252 –482 –452 Abroad –5,243 –3,836 –4,420 –784 –908 –1,116 –1,612 –1,598 In Taiwan 2,248 222 2,926 416 516 864 1,130 1,146Portfolio investment –7,953 –2,412 9,079 854 2,691 2,892 2,642 2,485 Assets –6,749 –4,220 –4,835 –1,023 –1,053 –682 –2,077 –4,122 Liabilities –1,204 1,808 13,914 1,877 3,744 3,574 4,719 6,607Other investment 3,657 8,521 4,235 1,599 766 102 1,768 4,506 Assets –1,291 3,494 4,934 5,674 75 –1,803 988 1,044 Liabilities 4,948 5,027 –699 –4,075 691 1,905 780 3,462

Capital- & financial-account balance –7,605 2,314 11,647 2,053 3,026 2,684 3,884 6,421

Net errors & omissions –174 –924 1,162 768 971 –799 222 1,118

Overall balance –728 4,827 18,593 4,882 5,465 2,706 5,540 8,024

Change in reserves (– indicates increase) 728 –4,827 –18,593 –4,882 –5,465 –2,706 –5,540 –8,024


The financial balance improved year on year in the first quarter of 2000, owingto a sharp increase in “other investment” inflows and further strong inflows ofportfolio investment, as foreign fund managers sought to profit from therobust revenue growth achieved by firms listed on the local stock exchangeand ensure their global assets were distributed in line with benchmarks set byMorgan Stanley Capital International (MSCI) and FTSE International. (MSCI

The balance-of-paymentssurplus rises

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EIU Country Risk Service May 2000 © The Economist Intelligence Unit Limited 2000

announced on August 12th 1999 that it would increase the weighting accordedto Taiwan in its global stockmarket indices; on May 2nd a new global index,the FTSE All-World Index, was launched, the first FTSE to include Taiwan.)

The sharp improvement in the capital- and financial-account balance offset thedeterioration in the current-account surplus. As a result, the overall balance-of-payments surplus in the first quarter of 2000 rose to US$8bn, compared with asurplus of US$4.9bn recorded in the year-earlier period. The strong inflows ofcapital caused foreign-exchange reserves to surge in the first quarter of 2000 toa record high of US$113bn at end-March. The balance-of-payments surplusalso supported the local currency: after averaging NT$32.3:US$1 in 1999, theexchange rate averaged NT$30.7 in the first three months of 2000.

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