In 2004, the global economic recovery helped Taiwan to post strong external trade numbers. Total exports amounted to US$182.4 billion and total imports to US$168.8 billion. Domestic demand also picked up as a result of buoyant consumption and investment. Although surging oil prices and interest rate hikes by major countries were a drag on economic expansion during the second half of the year, real GDP grew by a respectable 6.07 percent. Furthermore, consumer prices rose by 1.62 percent as international commodity prices increased and a severe typhoon season pushed up fruit and vegetable prices.

In the wake of economic expansion, rising prices, and negative real interest rates, the Central Bank of China (CBC) 中央銀行 turned its low interest rate policy into a neutral monetary stance in October due to concerns about inflation. By the end of 2004, the CBC had twice raised the discount rate, gradually leading market rates upwards.

Throughout 2004, monetary aggregates expanded moderately. M2 grew by 7.45 percent. Moreover, the NT dollar exhibited dynamic stability, trading at 31.917 against the US dollar at the end of 2004, an appreciation of 6.46 percent over a year earlier. Meanwhile, foreign exchange reserves continued to build to US$241.7 billion.

In recent years, the government has been promoting financial reforms to improve the health of the financial system. By the end of 2004, the non-performing loan (NPL) ratio of domestic banks had dropped to 2.78 percent from a high of 8.04 percent in the first quarter of 2002. In July 2004, the Financial Supervisory Commission (FSC) under the Executive Yuan 行政院金融監督管理委員會 was established to take responsibility for financial supervision. The current objective of the government is to enhance the international competitiveness and operational efficiency of domestic financial institutions through mergers and acquisitions and by attracting foreign investment to Taiwan's financial sector.

Note: The average exchange rate was NT$34.42 per US$1 in 2003 and NT$33.42 per US$1 in 2004.

Public Finance

For 2004, the central government's finances improved mainly due to a domestic economic expansion, the gradual recovery of the local stock and real estate markets, and the adoption of cost-saving and revenue-increasing initiatives. Central government revenues increased by NT$47.24 billion, while expenditures decreased by NT$53.33 billion. As a result, the central government's deficit narrowed to NT$196.64 billion, a substantial decline from the previous year.

Government Revenues

The total revenue of the central government increased by 3.58 percent in 2004 to NT$1.37 trillion. Tax revenue and surpluses of public enterprises and utilities remained the two major revenue sources, accounting for 67 percent and 20.62 percent of the total, respectively. Compared with the previous year, 2004 saw a 10.63 percent increase in tax revenue; surpluses of public enterprises and utilities, however, dropped by a substantial 13.58 percent.

Government Expenditures

Central government expenditures declined by 3.30 percent to NT$1.56 trillion in 2004. Among the components, national defense expenditures grew by 9.30 percent over the previous year. Most of the other components posted decreases, however. Spending on economic development declined 15.78 percent, that on community development and environmental protection fell 13.59 percent, and interest payments dropped 12.15 percent.

Central government spending as a percentage of GDP fell in 2004 to 14.53 percent, down from 2003's 15.68 percent, and the fiscal deficit declined to NT$196.64 billion from NT$297.21 billion. The fiscal deficit was equal to 12.57 percent of total government expenditures, a decline of 5.80 percent compared with 2003 figures. The fiscal deficit in 2004 shrank to 1.83 percent of GDP from the 2.88 percent recorded in 2003.

Debt Financing and Obligations

The demand for debt financing dropped in 2004 because of an increase in central government revenue. The total amount of the fiscal deficit plus debt repayments dropped to NT$252.7 billion from the preceding year's NT$343.7 billion. Nearly this entire amount was raised through issuing government bonds and bank loans. The remaining amount was appropriated from surpluses of previous years. Despite the remarkable narrowing of the fiscal deficit, the debt obligation of the central government continued to increase in 2004. The outstanding debt of the central government reached NT$3.4 trillion at the end of 2004, equal to 31.54 percent of annual GDP.

Budget Allocation

The central government and municipalities submit their proposed budgets for review by the relevant legislative body four and three months, respectively, before the beginning of each fiscal year. County and city governments, cities under county jurisdiction, and urban and rural townships submit budget proposals to their respective legislative bodies two months in advance.

Funding for the budgets comes mainly from national and local taxes. Funds are then allocated proportionally to each government level in accordance with the Act
Governing the Allocation of Government Revenues and Expenditures 財政收支劃分法. As to funding for local governments, the Executive Yuan reviews the financial condition of each government level every year and considers whether to revise the Distribution Regulations for Centrally-Allotted Tax Revenues 中央統籌分配稅款分配辦法 and adjust the percentage of tax revenues to be appropriated to the various levels of government. The tax revenues shall, however, account for an appropriate proportion of the fiscal expenditures at each government level. Each level is also required to contribute a certain proportion of local financial resources. The centrally-allotted tax revenues are distributed among political divisions as follows: 43 percent for the special municipalities of Taipei and Kaohsiung; 39 percent for county and city governments; and 12 percent for cities as well as rural and urban townships under county jurisdiction. The remaining 6 percent is set aside for special purposes.

Local governments are encouraged to develop their own sources of income. They may increase their revenues by levying taxes or charging fees for specific purposes in the areas under their jurisdiction.

Money and Banking

Monetary Aggregates

Monetary aggregates increased markedly during 2004. The strong growth in the narrow aggregate M1B largely reflected a higher demand for transactions balances, which is associated with low interest rates and with an ongoing strengthening of economic activity.

On the strength of a substantial increase in bank credit to the private sector and considerable inflows of foreign capital, the broad aggregates M2 and M2 plus bond funds grew at annual rates of 7.45 percent and 8.14 percent, respectively, both above their respective targets (target ranges were 2.5 to 6.5 percent and 4 to 8 percent) set for the year.

The average annual growth rate of reserve money was 11.38 percent in 2004, a sharp increase of 6.1 percentage points from that of the previous year. The acceleration in reserve money was mostly driven by the strong growth in net foreign assets of the CBC.

Of the various types of reserve money, currency held by the public increased by 12.44 percent and reserves held by financial institutions grew by 10.68 percent.

Banking Sector

As of the end of 2004, there were 398 depository institutions operating in Taiwan, while 14 financial holding companies had been set up since the Financial Holding Company Act 金融控股公司法 went into effect in November 2001.

With respect to the market shares of deposits and loans by type of depository institution at the end of 2004, domestic banks accounted for 69.40 percent of deposits and 86.63 percent of loans. Both of these figures were higher than in the previous year mainly due to domestic mergers involving a medium-sized business bank and some credit cooperative associations. As for foreign banks, although foreign currency deposits continued to grow, their market share of deposits dropped slightly. Their share of loans, however, increased due to the marked growth in loans extended to the private sector.

Total deposits at depository institutions as of the end of 2004 had increased by an annual rate of 6.89 percent, higher than the rate of 5.48 percent for 2003. All monthly growth rates of deposits exceeded 6 percent, with an annual average of 7.23 percent, more than double the 3.56 percent of the previous year. The growth rate of foreign currency deposits increased slightly from 12.36 percent to 12.88 percent. In October 2004, the first domestic money market mutual fund was established. Because of their high convertibility and substitutability for bank deposits, money market mutual funds are considered as time deposits of depository institutions. There were altogether two money market mutual funds at the end of 2004, the combined assets of which stood at NT$1.5 billion.

Boosted by a significant domestic economic recovery and banks' aggressive promotion of their consumer finance business, the annual growth rate of loans and investments rose to 8.65 percent at the end of 2004. Loans posted an annual growth rate of 10.71 percent at year's end, a significant increase over the 4.40 percent recorded a year earlier. Loans extended to private enterprises and individuals at the end of 2004 accounted for 85.05 percent of total loans, higher than the 83.39 percent recorded a year earlier. The annual growth rate of investments rose to negative 4.81 percent from the negative 6.15 percent of the previous year.

The total amount of funds raised during 2004 by the non-financial sector, comprising enterprises, households, and the government as a whole, showed a marked increase from the previous year's NT$1.68 trillion to NT$2.13 trillion, the highest figure recorded since 1998. Due to the significant increase in loans and investments, those funds borrowed from financial institutions, including depository institutions, investment and trust companies, and life insurance companies, jumped from 42.69 percent in 2003 to 85.71 percent in 2004. Conversely, the share of funds raised directly from financial markets via the issues of various marketable securities to the general public without the involvement of financial institutions decreased from 57.31 percent to 14.29 percent. The decline was mainly due to the decreasing issues of corporate bonds and offshore bonds.

The average NPL ratio of all depository institutions, including domestic banks, foreign banks, credit cooperatives, and credit departments of farmers' and fishermen's associations, decreased each quarter of 2004. As of the end of 2004, the ratio had declined to 3.28 percent from the 5.00 percent recorded a year earlier. In the meantime, the corresponding NPL ratio for domestic banks alone (including their offshore banking units and overseas branches) also dropped, from 4.33 percent at the end of 2003 to 2.78 percent at the end of 2004.

In 2004, interest rates offered by banks remained largely flat before October, and then began to rise, affected by an increase in the CBC's discount rate. As for those of the five major domestic banks, the average fixed rates on one-month and one-year time deposits were 1.05 percent and 1.40 percent, respectively, at the end of 2003. Both remained unchanged until the end of September 2004, and then increased to 1.15 percent and 1.52 percent at the end of 2004. The base lending rates of the five major domestic banks were lowered to 3.41 percent at the end of August, as compared with the 3.43 percent posted at the end of 2003, and then were increased to 3.52 percent at the end of December.

The weighted average rates on both deposits and loans of domestic banks were lower in 2004 than in the previous year. The weighted average deposit rate for the whole year was 1.17 percent, lower than the 1.47 percent recorded in the previous year. The weighted average lending rate for 2004 declined from the previous year's 4.10 percent to 3.47 percent. Because lending rates declined faster than deposit rates, the interest spread between deposits and loans shrank to 2.21 percentage points in the fourth quarter of 2004, less than the 2.47 percentage points recorded in the fourth quarter of 2003.

The profitability of banks increased significantly during 2004. The combined pre-tax earnings of all depository institutions grew by NT$107 billion to NT$193.8 billion. The average return on assets (ROA) and return on equity (ROE) for all depository institutions rose to 0.59 percent and 10.67 percent in 2004, respectively, from the 0.29 percent and 5.22 percent recorded a year earlier. With the exception of foreign banks and Chunghwa Post Co., Ltd. 中華郵政股份有限公司, ROEs and ROAs for depository institutions were higher than those of the previous year. Foreign banks remained leaders in terms of ROEs and ROAs.

Number of Financial Institutions
	2003	2004	2005
Combined Number of Main Offices	400	398	392
Domestic Banks	45	45	42
Medium-sized Business Banks	5	4	4
Foreign Banks	36	35	36
Credit Cooperatives	35	32	29
Credit Departments of Farmers' and Fishermen's Associations	278	279	278
Postal Savings System	1	1	1
Money Market Mutual Funds	0	2	2
Combined Number of Branches	5,923	5,911	5,937
Local Branches	5,772	5,761	5,789
Overseas Branches	81	80	79
Offshore Banking Units	70	70	69
Source: Central Bank of China

Financial Holding Companies

Around 1990, during a period of regulatory liberalization, the number of domestic banks in Taiwan grew from 25 to more than 50, causing the over-saturation of the financial market. To increase competitiveness as part of a host of financial reforms, the government has encouraged companies to consolidate their financial services. As of the end of 2004, 14 financial holding companies had been established in Taiwan and most have banking services as their core business. Cathay Financial Holdings 國泰金融控股股份有限公司 is currently Taiwan's largest financial holding company with over nine million clients and total assets valued at NT$2.5 trillion (US$74.8 billion). The Financial Holding Company Act encourages financial institutions to integrate and diversify the services they offer while enlarging their economies of scale. It allows the establishment of financial holding companies and their investment in subsidiary institutions engaging in different kinds of financial services such as banking, insurance, securities, bills finance, and venture capital. Cross-selling of financial products is partially allowed under the holding company structure. Information and equipment may also be shared under one roof. In addition, financial holding companies are required to focus on six areas: internal control and audit mechanisms; comprehensive risk management policies and guidelines; consumer protection and privacy issues; information disclosure and market discipline; supervision of related-party trading; and enhancement of accountability.

On the global front, however, Taiwan's holding companies cannot compete with their international counterparts due to their small size. To enlarge financial holding companies and increase their competitiveness abroad, the government encourages further mergers.

Taiwan also encourages foreign investors to enter this sector. The Financial Holding Company Act allows foreign holding companies to invest in local financial institutions or own up to 100 percent of their own operations. This is in hopes that foreign investment will add to local holding companies' capital, enhance their competitive edge in the global market, and introduce advanced strategies.

Money Market

Demand for funds gradually regained momentum as economic activity picked up throughout 2004, while the supply of funds was mainly affected by cross-border capital flows and bond fund withdrawals. In the first quarter, funding conditions in the banking system remained easy as a result of massive foreign capital inflows.

In the second quarter, however, the NT dollar depreciated on expectations of US Federal Reserve Board rate hikes, and the stock market was made jittery by China's macroeconomic tightening, rising oil prices, and political uncertainties following Taiwan's presidential election. These factors combined to cause a net outflow of foreign capital. In the second half of the year, funding conditions tightened slightly as bond funds faced tremendous withdrawals due to certain corporate bond defaults. For the year as a whole, the total annual turnover in the interbank call-loan market amounted to NT$10.2 trillion, an increase of 16.21 percent over the previous year.

Domestic banks were the largest borrowers in the interbank call-loan market during 2004, accounting for 66.28 percent of total trading, a 6.49 percentage-point rise from the previous year. They were followed by bills finance companies, Chunghwa Post Co., Ltd., and foreign banks, with shares of 23.86 percent, 4.99 percent, and 3.86 percent, respectively.

With regard to loans, domestic banks continued to be the largest suppliers of funds, accounting for 73.62 percent of total transactions, a slight decrease from the previous year. Medium-sized banks accounted for 10.63 percent, foreign banks for 5.39 percent, and Chunghwa Post Co., Ltd. for 4.31 percent.

Overnight interbank call loans remained the most actively traded in the market with a share of 62.66 percent, followed by those with maturities of one week and two weeks with respective shares of 22.90 percent and 10.51 percent. Trading of those with maturities ranging from two months to six months accounted for a negligible 0.09 percent.

In 2004, new issues of short-term bills declined 8.7 percent from the previous year to NT$6.89 trillion. Issues of commercial paper declined to 81.91 percent of this figure because enterprises shifted to bank credit for fund-raising as banks actively promoted their loan business and lending rates dropped to record lows. Negotiable certificates of deposit grew to 15.68 percent of the total due to the growth in banks' loan business and the decision by some investors to shift their money over from bond funds. Issues of Treasury bills and banker's acceptances increased to 1.90 and 0.51 percent, respectively.

The Ministry of Finance (MOF) 財政部 increased the issues of Treasury bills to meet short-term funding needs. As of the end of December 2004, total outstanding bills amounted to around NT$1.32 trillion, 10.22 percent higher than the previous year's end.

Total turnover of short-term bills in the secondary market increased by 1.98 percent to around NT$48.83 trillion. Commercial paper made up the largest share at 76.54 percent of all transactions, followed by negotiable certificates of deposit with a share of 18.73 percent.

In the first half of 2004, funding conditions in the domestic market remained easy due to a net inflow of foreign capital. Accordingly, the interbank overnight call-loan rate steadily declined from the beginning of the year, reaching a record low in May, while other major money market rates followed suit and also fell to record lows. Thereafter, funding conditions tightened as foreign capital recorded a turnaround and began a net outflow. Furthermore, bond funds witnessed considerable withdrawals in the second half of the year, exacerbating the already tight funding conditions. The CBC raised the discount rate by 25 and 12.5 basis points in early October and late December, respectively, to ease concerns about inflation. Tighter funding conditions and the CBC's actions reversed the downward trend of money market rates beginning in May 2004.

In 2004, the interbank overnight call-loan rate, measured on a daily average basis, averaged 1.06 percent, a 0.04-percentage-point decrease from a year earlier. The average issuing rate and secondary market rate of commercial paper with maturities of 1 to 30 days also declined from 1.28 percent and 1.00 percent to 1.13 percent and 0.95 percent, respectively, over the same period.

Foreign Exchange Market

At the end of 2004, the NT dollar closed at 31.917 against the US dollar, a 6.46 percent appreciation over the exchange rate of 33.978 at the end of 2003. On a daily-average basis, the NT dollar/US dollar exchange rate for 2004 was 33.422, representing an appreciation of 2.98 percent over the previous year.

With respect to other major currencies, the NT dollar appreciated against the Japanese yen by 1.68 percent and depreciated against the euro by 1.15 percent between the end of 2003 and the end of 2004. When based on the trade-weighted average exchange rate against major trading partners (weighted by the sum of imports and exports), the NT dollar appreciated by 3.39 percent between the end of 2003 and the end of 2004.

Trading in the Taipei foreign exchange market increased significantly in 2004. After deducting double counting on the part of interbank transactions, total net trading volume in the market for the year increased by 40.4 percent from the previous year to US$2.58 trillion. The daily average turnover stood at US$10.24 billion, an increase of 39.8 percent over the previous year.

In terms of trading partners, transactions between banks and non-bank customers accounted for 32.5 percent of total net turnover. Interbank transactions made up the remaining 67.5 percent, of which transactions among local banks accounted for 20.8 percent and those between local banks and overseas banks for 46.7 percent.

As far as traded currencies are concerned, transactions in third currencies accounted for 52.2 percent of total trading volume, with trading in currency pairs of US dollar/Japanese yen and US dollar/euro accounting for 20.2 percent and 16.3 percent, respectively. NT dollar trading against foreign currencies accounted for 47.8 percent of total trading volume, of which trading of NT dollars against US dollars was 45.3 percent.

With respect to types of transactions, spot transactions accounted for the highest share at 50 percent of total turnover, followed by foreign exchange swaps at 23.9 percent, options at 13.6 percent, forwards at 10.6 percent, margin trading at 1.2 percent, and cross-currency swaps at 0.7 percent. Compared with 2003, the trading volumes of foreign-exchange swaps, options, and forwards all recorded growth rates of above 60 percent, but margin-trading transactions decreased. This indicated that banks tended to use the interbank swap market to adjust their currency composition, and that businesses were inclined to utilize financial derivatives to hedge the increasing risks they faced.

In 2004, turnover of forwards, swaps, and options on foreign-currency interest rates, commodity prices, stock price indices, and credit derivatives amounted to US$163.82 billion. Of this amount, interest rate-related derivatives totaled US$155.82 billion or 95.1 percent, representing an annual growth rate of 85.3 percent. This was mainly because of the sharp increase in euro-convertible-bond-related asset swaps, such as interest-rate swaps and interest-rate options.

The transaction volume of the foreign-currency call-loan market reached a little over US$1.49 trillion in 2004. US dollar transactions accounted for almost the entire amount, but recorded a decline of 4.4 percent from 2003. The decrease was mainly because some banks raised interest rates on US dollar deposits to attract foreign currency, hence reducing their demand for foreign-currency call loans.

At the end of 2004, there were 70 offshore banking units (OBUs) in operation. Domestic banks operated 42 of the OBUs, while foreign banks ran the other 28. The combined assets of all OBUs totaled US$69.22 billion at the end of the year, an increase of US$6.7 billion, or 10.7 percent, from the previous year's end. This was a result of increases in loans to non-financial institutions and claims on financial institutions. Domestic bank OBUs accounted for US$48.21 billion, or 69.6 percent, of these combined assets, and foreign bank OBUs accounted for US$21.01 billion, or 30.4 percent, of the total.

The OBUs' main sources of funds were from affiliated branches and financial institutions, which together accounted for 61.7 percent of total liabilities. These were followed by deposits made by non-financial institutions, which accounted for 27.2 percent of total liabilities. OBUs have been gradually developing into capital management centers for overseas Taiwanese businesses. In terms of geographical origin, 64 percent of funds came from Asia and 20 percent from the Americas.

The OBUs' funds were mainly earmarked for affiliated branches and deposits with financial institutions. These accounted for 53.6 percent of total assets. Second to these were loans extended abroad and locally, at 26.1 percent. Portfolio investments accounted for 9.7 percent of total assets. In terms of fund destination, 67 percent of funds went to Asia and 20 percent to the Americas.

The forex-trading turnover of all OBUs in 2004 was US$117.88 billion, of which US$75.06 billion was for spot transactions, US$23.1 billion for forward transactions, and US$19.72 billion for foreign exchange swap transactions. Forward transactions increased 320 percent over 2003, mainly because Taiwanese firms in mainland China used non-deliverable forwards of the US dollar against the Chinese renminbi to hedge risks. Foreign exchange swap transactions increased by 93 percent, mainly because the significant appreciation and large fluctuations of the euro and the Japanese yen against the US dollar led firms to use them to hedge risks. The total turnover of other derivative products, including margin trading, options, foreign-currency interest rate swaps, financial futures, foreign-currency forward-rate agreements, cross-currency swaps, commodity swaps, and credit derivatives, amounted to US$62.95 billion, an increase of 6.5 percent over the previous year.

Stock Market

Taiwan Stock Exchange

The Taiwan Stock Exchange (TSE) weighted stock price index (TAIEX) closed at 6,140 points at the end of 2004, an increase of 249 points or 4.2 percent from the end of 2003. The daily average trading value for the year increased by 16.9 percent from the previous year's NT$81.7 billion to NT$95.5 billion.

There were a total of 697 companies listed on the TSE at the end of 2004, an increase of 28 companies from the previous year's end. Total market capitalization rose 8.7 percent to NT$14 trillion.

Foreign investors registered a net purchase of NT$284 billion in the TSE market, while local investment and trust companies and local securities dealers recorded net sales of NT$14.1 billion and NT$15.4 billion, respectively.

As for the various sectors, most of the industrial group stock price indices went up in 2004. Construction shares, which recorded a gain of 39.7 percent, outperformed other shares due to a strong recovery in the property market. Steel and iron share prices rose 32.7 percent, reflecting a continuous rise in international steel prices. Transportation share prices increased by 20.5 percent owing to rising profitability. Raw material-related shares, such as textile, paper and pulp, and cement and ceramics shares, performed well due to high international prices. Banking and insurance share prices increased by 20 percent, mainly because of rising profitability after a substantial reduction of NPL ratios and on-going mergers involving financial holding companies. Electrical and electronic machinery share prices fell by 6.4 percent, as prospects declined in the second half of the year, multiple cases of financial-statement fraud plagued the sector, and a sharp appreciation of the NT dollar in the fourth quarter caused foreign exchange losses in this export-driven sector.

GreTai Securities Market

The GreTai Securities Market (GTSM, an over-the-counter market) 證券櫃檯買賣中心 weighted stock price index closed 2004 at 115.8 points, down 1.3 percent from 117.3 points recorded at the end of 2003. Of all the industrial groups, construction shares recorded the biggest gain, while shares of electronics firms registered the largest decline. The daily average turnover for the year reached NT$13.9 billion, a rise of 68.1 percent compared to the previous year. The number of companies listed on the GTSM increased by 43 to 466 at the end of 2004. Market capitalization was valued at NT$1.1 trillion at the end of 2004, a decline of 6.5 percent from the previous year's end. Foreign investors and local securities dealers sold a net of NT$12.7 billion and NT$8.5 billion worth of securities, respectively. Meanwhile, local investment and trust companies bought a net of NT$4.9 billion for the year.

Bond Market

In 2004, the number of new issues of bonds hit record highs, amounting to around NT$1.02 trillion. Among them, the government continued to increase its issues to offset rising budget deficits. Issues of corporate bonds fell to a new low under the influence of rising interest rates and corporate scandals at some technology companies. Bank debenture issues increased significantly as banks managed to improve their capital adequacy ratios and strengthen their risk tolerance. NT dollar-denominated bonds issued by international financial institutions in Taiwan decreased substantially owing to rising issuance costs. Issues of asset securitization products increased, mainly due to their eligibility to be counted as liquidity reserves of banks, and a low withholding-tax rate on investment returns relative to other similar financial products.

The total turnover of bonds in the secondary market recorded a historic high in 2004, while bond yields fluctuated within a narrow range. Bond funds shrank substantially during the year because of the rise in interest rates and redemptions by investors.

The MOF issued central government bonds worth NT$465 billion in 2004, the highest figure ever, reflecting the government's tight fiscal position. The amount of when-issued trading for the year totaled NT$14.8 trillion, which jumped 150.85 percent from the NT$5.9 trillion recorded in 2003.

The MOF also regularly issued different maturities of re-opened government bonds of lengths of 5, 10, and 20 years. This was done in order to build an effective bond yield curve and extend the duration of benchmark bonds. Since July 1, 2004, the government-bond auction system has adopted a single-price (also called a Dutch auction) instead of a multiple-price bidding process. Under this new auction method, all bidders settle at the highest winning rate, thereby reducing the volatility of bond yields in the secondary market. For the year, total issues of corporate bonds were NT$231.4 billion, a decline of 17 percent from the previous year.

In 2004, new issues of NT dollar-denominated bonds by international financial institutions dropped to NT$10.5 billion, a decrease of 76.67 percent from the previous year. Of these issues, the European Bank for Recovery and Development accounted for the largest share at NT$7 billion. The weighted average issuing interest rate on five-year NT dollar foreign bonds ranged from 2.25 percent to 2.40 percent.

Trading in the bond market remained relatively active and totaled a record high of NT$205.93 trillion in 2004, a marginal increase of 1.13 percent from the previous year. Of this amount, outright transactions decreased by 2.47 percent, and repurchase agreement transactions climbed 7.04 percent. Outright transactions accounted for 59.9 percent of all transactions, and repurchase agreements for 40.1 percent.

Bond funds expanded substantially in the first half of 2004, as interest rates on bank deposits remained at record lows. During the second half of the year, a rise in interest rates, coupled with the failure of the United Securities Investment Trust Corporation 聯合投信公司, caused large redemptions of bond funds in general. Prudent steps taken in the following months to boost the credibility of bond funds, however, helped curb redemptions of bond funds. The net assets of local bond funds were NT$1.88 trillion at the end of 2004.

Futures Market

Taiwan Futures Exchange (TAIFEX) 臺灣期貨交易所 posted a total trading volume of 59,146,376 contracts in 2004, an increase of 85.56 percent from 2003. The average daily volume in 2004 was 237,144 contracts. The trading volume of the TAIFEX flagship contract, the TAIEX Options, amounted to over 43 million contracts in 2004, climbing 101.77 percent over 2003 figures. The top futures contract, the TAIEX Futures, saw an increase of more than 36.02 percent to 8,861,278 contracts in 2004. The contract with the largest growth was stock options. It experienced tremendous growth of 103.25 percent over 2003 figures, with an annual volume of 410,026 contracts.

In accordance with a plan to introduce internationalized products to the local market, the TAIFEX on March 27, 2006, launched three US dollar-denominated products: MSCI Taiwan IndexSM Options, MSCI Taiwan IndexSM Futures, and Gold Futures contracts.

Insurance Market

Since the government opened up the insurance market in 1987, this industry has developed rapidly, with an average annual insurance premium income growth rate of 15.40 percent from 1995 to 2004. By the end of 2004, a total of 55 companies (28 life insurance companies, 25 non-life insurance companies, and 2 re-insurers) had acquired licenses to operate in the domestic market. Between 1995 and 2004, the total premium income of the industry increased from NT$385.1 billion to NT$1.44 trillion.

At the end of 2004, the total assets of this industry had reached NT$5.71 trillion, accounting for 16.63 percent of all assets held by financial institutions in Taiwan, an increase of 1.59 percentage points over 2003 figures. This continued growth demonstrates the increasing importance of the insurance industry to Taiwan's financial markets.

Financial Reforms

Over the years, Taiwan has strengthened financial re-regulation and supervision in response to changes in the financial environment. Rapid expansion of financial markets following deregulation of financial activities, financial innovations, new entries to the financial sector, and possible disorder associated with financial realignment have all made re-regulation necessary.

Regulating some areas while deregulating others is presently the most important task of financial restructuring in Taiwan. In May 2002, the Executive Yuan launched the Challenge 2008 National Development Plan 挑戰二○○八：國家發展重點計畫, which covers political, fiscal, and financial reforms.

The first stage of reform focuses on improving the financial system. In the past decade, too many banks resulted in cutthroat competition in the financial market, which caused the NPL ratio to soar and prevented banks from making profits. In addition, numerous regulations intended to make the sector sound actually hindered growth and competitiveness.

To remedy the situation, the Legislative Yuan passed the Financial Institutions Merger Act 金融機構合併法 in January 2000. In June of the following year, six finance laws were passed in a special parliamentary session, including the Financial Holding Company Act, the Act Governing Bills Finance Business 票券金融管理法, and the Act for the Establishment and Administration of the Financial Restructuring Fund 金融重建基金設置及管理條例.

The Act Governing Bills Finance Business strengthens the clearing, settlement, and depository system for short-term bills, as well as provides a legal basis for centralization. It also reinforces the operating structure of bills finance companies, which are allowed to buy, sell, or underwrite bank debentures in addition to dealing in short-term money market instruments. They are also permitted to issue corporate bonds as a means to raise long-term capital and reduce over-reliance on short-term funds. Based on the Act for the Establishment and Administration of the Financial Restructuring Fund, the government has established a quasi-Resolution Trust Corporation (RTC) mechanism to facilitate the restructuring or liquidation of poor-quality assets in the banking industry, and, if necessary, require insolvent institutions to cease operations and exit the market. On June 22, 2005, an amendment to the Act for the Establishment and Administration of the Financial Restructuring Fund was promulgated, increasing the fund's size by NT$110 billion to meet the need for handling several insolvent financial institutions still existing in the market. To keep Taiwan's financial norms up to par with international standards, the government has also revised the definition of NPLs. Due to concerted efforts by the government and the banking sector, the NPL ratio of domestic banks, which peaked at 8.09 percent in April 2002, declined to 2.24 percent at the end of December 2005.

Non-performing Loan (NPL) Ratio by Percentage
Date	Total NPL Ratio	Domestic Banks*	Local Branches of Foreign Banks	Credit Cooperatives	Credit Departments of Farmers' and Fishermen's Associations
1998 Dec.	4.93	4.37	1.65	7.55	13.10
1999 Dec.	5.67	4.88	3.20	10.54	16.03
2000 Dec.	6.20	5.34	3.22	12.45	17.91
2001 Dec.	8.16	7.48	3.53	11.66	19.37
2002 Dec.	6.84	6.12	2.36	10.34	18.62
2003 Dec.	5.00	4.33	1.51	6.91	17.57
2004 Dec.	3.28	2.78	1.03	3.17	14.51
2005 Mar.	3.20	2.74	0.95	2.83	13.97
June	2.90	2.46	0.85	2.39	13.13
Sept.	2.75	2.80	0.82	2.84	-
Dec.	2.19	2.24	0.75	2.09	-
*Trust and investment companies are not included.
Source: Banking Bureau, Financial Supervisory Commission

To strengthen the financial and real estate markets, the government promulgated the Financial Asset Securitization Act 金融資產證券化條例 on July 24, 2002, and the Real Estate Securitization Act 不動產證券化條例 on July 23, 2003. As of the end of 2005, 37 securitization cases totaling NT$269.8 billion had been approved by the government. The Legislative Yuan has been deliberating an amendment to the Real Estate Securitization Act to further expand the types of securitizable real estate.

In terms of market discipline, Taiwan has always striven to comply with international standards on corporate governance, and has required financial institutions to ensure proper corporate governance, risk management, and internal controls. For instance, on February 6, 2003, the Money Laundering Control Act 洗錢防制法 was amended to more effectively prevent money-laundering activities and strengthen international cooperation on counter-terrorism. To improve the authorities' ability to combat financial crimes, the Legislative Yuan passed amendments to seven finance laws on April 29, 2005, increasing penalties for financial crimes. The seven laws are as follows: the Banking Act 銀行法, the Financial Holding Company Act, the Act Governing Bills Finance Business, the Trust Enterprise Act 信託業法, the Credit Cooperatives Act 信用合作社法, the Insurance Act 保險法, and the Securities and Exchange Act 證券交易法.

The Financial Supervisory Commission was inaugurated on July 1, 2004, to promote integrated financial supervision in Taiwan. The commission's main function is to consolidate all financial development policies and administrative resources. As a cabinet-level agency, the commission supervises and examines the banking, securities, futures, financial holding, and insurance industries. It is hoped that the global competitiveness of Taiwan's financial sector can be increased and that Taiwan can be transformed into an Asia-Pacific investment, financial management, and service center. With this in mind, this central supervisory agency will work to liberalize outdated laws and regulations to help speed up the modernization of this sector, strengthen cross-strait financial interaction, and encourage financial institutions to provide a broader array of financial services.

Related Websites
Central Bank of China：	http://www.cbc.gov.tw
Financial Supervisory Commission：	http://www.fscey.gov.tw
Ministry of Finance：	http://www.mof.gov.tw
Taiwan Stock Exchange Corporation：	http://www.tse.com.tw
GreTai Securities Market：	http://www.otc.org.tw
Taiwan Futures Exchange：	http://www.taifex.com.tw

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