Books on Taiwan
New Taiwan dollar (TWD)
Update No: 018 - (07/07/05)
Taiwan's 300-member National Assembly, chosen by popular ballot in May to
consider proposed constitutional changes put forward by Taiwan's two leading
political parties - the ruling DPP and the opposition KMT - has approved
sweeping reforms that included a proposal that any future change to the
constitution has to be approved directly by Taiwan's voters. This was a direct
slap in the face to China, which has strongly opposed such a move and the change
can be seen in part as Taiwan's answer to China's Anti-secession law, approved
Two of the amendments, instituting a first-past-the-post system in electoral
constituencies and cutting in half the number of seats in Taiwan's unicameral
legislature will favour a two-party system in future elections and put at risk
the smaller parties such as the People First Party and the Taiwan Solidarity
Under the new rules, future constitutional change will be made substantially
more difficult by the fact that from now on any change must by approved by a
majority of all Taiwan's eligible voters, and not just a majority of votes cast.
With its work completed, the National Assembly now passes into history.
Originally composed of delegates from each Chinese province, the National
Assembly was responsible not only for approving constitutional changes but also
for electing Taiwan's president. Direct presidential elections were instituted
in 1995 and now, the sole remaining function of the National Assembly has been
passed directly to the people of Taiwan. Beijing will be less than pleased.
Taiwan's Supreme Court has rejected an opposition appeal that sought to nullify
the re-election of President Chen Shui-bian and Vice President Annette Lu on the
grounds that the appeal was politically motivated. The pan-blue camp had
originally filed two lawsuits, one seeking to nullify the election results and
the second to nullify the election itself, given the special circumstances of
last year's presidential election. Both cases were rejected by the Taiwan High
Court last year, whose decision the pan-blue camp sought to appeal to the
Supreme Court. While the Supreme Court rejected the lawsuit nullifying the
election's result last week, its decision on the second lawsuit is still
The Opposition has stubbornly refused to acknowledge the validity of the 2004
election and has accused the judges who heard the case of being partisan. As
local commentators have pointed out: while the very nature of a democracy is to
have an adversarial political system, the opposition of the Chinese Nationalist
Party (KMT) and the People First Party's (PFP) to bills proposed by President
Chen Shui-bian's administration is founded more on a deep-seated contempt and
distrust of him and his party, than on rational and well thought-out
disagreement with a particular line of policies. In taking this tack, the
opposition has brought the legislative process to a near impasse. The latest
legislative session, which ended on May 31, succeeded in passing an abysmally
low number of bills. Only 39 bills made into law, and it was the poorest
performance ever-breaking the previous record low of 53.
President Chen Shui-bian has urged government agencies to review and revise
current tax regulations to pare back the widening budget deficit and promote a
fairer taxation system. Mr. Chen believes that the value-added tax (VAT) should
be raised by one to two percentage points from the current 5 percent in the near
future. Such a tax increase would inject around NT$68 billion (US$2 billion) per
year into state coffers, which have suffered a shortfall of more than NT$300
billion annually over the past few years. According to government forecasts, the
budget deficit will worsen to a record NT$337.3 billion this year from an
estimated NT$304 billion last year. Mr. Chen also believes the tax base should
be widened and tax items simplified to boost efficiency. Others have proposed
that the VAT be increased to 10 percent.
Major directions laid out in his speech at a recent meeting of the economic
advisory board include establishing a minimum corporate tax scheme and imposing
capital-gains tax on transactions of unlisted companies' stocks. Some companies,
particularly high technology firms, are exempt from income taxes because of tax
breaks granted by the government to encourage investment.
In general, Mr. Chen hopes to increase the national taxation rate, a gauge that
divides taxes by GDP, from the current 13.6 percent to 15 percent within three
years, and has set a longer-term goal of 18 percent. He said the same ratio when
applied to OECD member countries is about 27 percent. Mr. Chen's instructions
are in line with conclusions reached by the Economic Development Advisory
Conference in 2001, which set a goal of balancing the budget in five to 10
Relations with China
Despite political difficulties with China, the economic and financial
relationship is robust. Chinese authorities will allow 10 Taiwanese banks to
upgrade their own representative offices in China to full banking operations and
Chinese banks have been granted permission to open representative offices in
Taiwan. Taiwanese banking executives, who foresee Chinese banks helping to
finance Taiwanese companies wishing to expand on the mainland, welcomed the
Interested Chinese lenders must apply to Taiwan's Financial Supervisory
Commission, whose chairman, Kong Jaw-sheng, said, "if they send their
applications, we will consider to approve," adding, "the next step is
branch office. If China agrees to do that, we don't see the problem." A
representative office allows banks to gather information and conduct market
research, but such firms cannot lend money or take deposits. China Merchants
Bank, Industrial Bank Co, Industrial & Commercial Bank of China (Asia) Ltd
and Pudong Development Bank established offices in Taiwan in November 2003.
While the presence of Chinese lenders in Taiwan would buttress mainland
companies operating on the island, Chinese banks still lack competitiveness in
relation to their Taiwanese counterparts. Currently, 69 Taiwanese banks operate
offshore units in China, which service overseas clients. Taiwan central bank
governor Perng Fai-nan said last month that he was prepared to allow Taiwanese
banks to offer foreign exchange services in the Chinese currency, indicative of
Taiwan's desire to expand banking operations more deeply on the mainland.
Developments in the economy
Taiwan, which is traditionally an export-oriented economy is certainly
feeling the effects of the slowing global slowdown, and especially attempts by
China to cool its economy. Increasingly Taiwan is looking to domestic
consumption to fuel future expansion of its economy. Real GDP increased by 2.5
percent during the first quarter of 2005. This was the slowest growth recorded
since the early 2003 at the height of the outbreak of SARS. Exports have grown
at their slowest in more than three years - up by just 1.2 percent in 1Q05 and
imports are also showing signs of slowing.
A slowdown in exports
May exports, as measured by Customs data, from Taiwan rose to a new monthly
high increasing by 4 percent from May 2004 to reach a total of US$16.3 billion.
Imports expanded even faster by 11.3 percent year-on-year to $16.14 billion.
This was the second-highest monthly import bill on record. Overall the May trade
surplus amounted to $181.7 million.
In May, Taiwan's exports to Southeast Asia increased by 14.5 percent to US$2.32
billion (14.2 percent of the total); exports to Hong Kong and China fell by 0.4
percent to $5.92 billion (36.3 percent); exports to the U.S. rose by 1.1 percent
to $2.56 billion (15.7 percent); to Japan by 2.6 percent to 1.18 billion (7.2
percent) and to Europe by 1.2 percent to $2.05 billion (12 .6 percent).
While the continuation of record trade amounts continues to be encouraging, in
seasonally adjusted terms the May export growth rate was actually the weakest
level since June 2003 and suggests that export growth continues to slow.
Taiwan's export manufacturing sector is heavily dependent on electronics items
and appears vulnerable to reduced demand in this market segment.
This is confirmed by the latest data on forward export orders. The growth in
Taiwan's export orders slowed in May. The cause was attributed directly to the
impact of China's efforts to slow its own expansion as well as by rising oil
prices. China's week-long holiday following its National Day celebrations, also
impacted on export orders from the PRC.
In May Taiwan's export orders rose by 13.14 percent from a year earlier to
US$19.52 billion. This was slower than the April growth rate of 15.42 percent.
Industrial output in May declined by 1.42 percent year-on-year compared to a
(revised) 0.92 percent increase in April. For the period January-May, orders
from Hong Kong and China were up by 20.92 percent from a year earlier however in
May export orders from Hong Kong and China grew by only 7.85 percent.
Unemployment rate holds steady
Taiwan's raw unemployment rate rose to 4.1 percent in May from 5.04 percent
in April. In seasonally adjusted terms the jobless rate was 4.2 percent in May
and only marginally below the seasonally adjusted rate of 4.21 percent recorded
in April. First time job seekers entering the market have influenced the result
and the jobless rate is expected to rise until August by which time new
graduates will have been absorbed into the workforce.
Central bank raises rates
Taiwan's central bank raised its benchmark discount rate by 12.5bps at the
end of the month, bringing borrowing costs to a three-year high of 2.0 percent.
Rates have been raised by 62.5bps since last September. The bank is acting to
prevent a further spike in inflation, expected to jump by 1.7 percent in 2005.
In a statement, the central bank said "due to inflationary pressure, real
interest rates are still relatively low and therefore monetary policy is
gradually returning to a neutral stance."
Higher utility charges and oil prices may drive inflation even higher and this
probably affected the central bank's decision. Taiwan's consumer price index
rose by 1.74 percent year-on-year in January-May 2005, while the average
one-year deposit rate at five major Taiwan banks is at 1.69 percent. According
to the central bank, the economy is slated to grow by 3.6 percent in 2005,
against 5.7 percent year-on-year in 2005, the fastest rate in four years.
Leading indicators confirm a slowing economy
According to Taipei's Council for Economic Planning and Development,
Taiwan's composite index of leading indicators rose by 0.8 percent
month-on-month in May and reversing a decline in the previous month. The
monitoring indicator remained at "yellow-blue" signalling that the
economy is on the brink of a slowdown.
The leading indicators provide a gauge of economic activity over the next three
to six months. Improvements came from the stock market, from hours worked in
manufacturing, land approved for construction and wholesale prices. Those
components that declined included exports, new manufacturing orders and M1B
money supply growth.
Foreign reserves position
Taiwan's foreign exchange reserves amounted to US$253.17 billion at the end
of May 2005, showing an increase of US$530 million from the figure recorded at
the end of last month and an increase of US$11,432 million compared to the end
of last year. The main factor cited as being responsible for the increase in
foreign exchange reserves in May 2005 was returns from foreign exchange reserves
But Taiwan remains a star for investors
Taiwan's investment environment ranked fifth among 50 nations in the latest
survey by Swiss-based Business Environment Risk Intelligence (BERI) SA. With a
score of 72, Taiwan shared the fifth place with Norway on the Profit Opportunity
Recommendation (POR) scale, which is composed of three evaluation factors: an
operations risk index, a political risk index and a remittance and repatriation
Switzerland took the first place with the best investment environment, followed
by Singapore, the Netherlands and Japan, the ministry said. In Asia, Taiwan
remained in third place after Singapore and Japan. According to the ministry,
Taiwan was awarded the highest level of 1A on the POR scale in BERI's first
business-risk service report this year. Among the three indexes, Taiwan scored
the highest ratings for remittance and repatriation, with a factor of 84,
bolstered by the nation's strengthening capability to earn foreign exchange and
sound policies regulating foreign exchange, the ministry said. But the political
risk index dragged down Taiwan's overall ranking in the wake of China's passage
of its "Anti-Secession" Law in March.