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  2003 2002 2001 Ranking(2002)
Millions of US $  406,000    
GNI per capita
 US $ 18,000
Ranking is given out of 208 nations - (data from the World Bank)

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Chen shui-bian

Update No: 018 - (07/07/05)

Political developments
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 last March.
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 Union.
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 pending.
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 years.

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 decision. 
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 management. 

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 factor.
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.

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