Dear Stockholders
The Fund's net asset value per share (NAV) declined 25.6% in the third quarter,
just about matching the 25.5% drop of the Taiwan Stock Exchange Index (TAIEX).
The New Taiwan dollar depreciated 0.3% against the U.S. dollar during the
period.
Like other major exchanges all over the world, Taiwan's took a beating in the
third quarter from the fall-out of terrorist attacks in the U.S. But even before
those tragic events, Taiwan's market had been battered by factors that were
present earlier this year. Key among them is a weakening economy. With exports
shrinking largely because of slumping demand for Taiwan's technology
manufactures, industrial production has slowed while unemployment has increased
to record levels. As a result, the economy in the second quarter contracted 2.4%
and continued to weaken in the most recent period.
The poor economic performance was reflected in corporate report cards.
First-half results for many listed companies were disappointing, especially for
downstream manufacturers in the personal computer industry. The third quarter
showed few signs of relief. Semiconductor companies, at the beginning of the
technology food chain, continued to suffer from sluggish demand and declining
prices.
The market did manage to rally in the middle of the period. This was kicked off
by a wave of foreign institutional buying. A further shot of support came when a
high-level economic conference, convened by the government, advocated easing
restrictions on investment in China and opening direct cross-strait transport
links. Underpinning the rally, which focused primarily on "old economy"
blue-chip stocks, was the perception that Taiwan's economy and stock market had
bottomed out and that both would likely improve in the last few months of the
year.
This all changed, however, in September. The immediate impact of the September
11 terrorist attacks in the U.S. was to disrupt Taiwan's trade since most of its
technology shipments are by air. This disruption was a major contributing factor
to the largest monthly export decline on record. The longer-term concern was the
near certainty of recession in the U.S., Taiwan's largest export market. Less
than a week after the attacks, Taiwan suffered from one of the worst typhoons to
hit the island in recent memory. Most businesses closed for two days, and
widespread flooding damaged Taipei's mass rapid transit system and parts of
Taiwan's north-south railway.
As noted above, Taiwan's economic situation continued to worsen in the third
quarter. Merchandise exports, which represent about 40% of gross national
product, declined 32%--almost twice the rate of the previous period. Domestic
demand also weakened. As unemployment rose and hopes of a year-end economic
turnaround were dashed by the events of September, even private consumption most
likely declined after managing a small rise in the second quarter. We estimate
that the economy contracted 4.3% in the recent quarter and forecast negative
1.7% growth for the year.
As horrific as the terrorist attacks on the U.S. were, they may speed up the
timetable for its economic recovery. This would come-somewhat ironically-as a
result of a bigger than expected contraction that can be put down largely to the
impact of the tragic events themselves. There are certainly indicators ranging
from savings to unemployment that point toward a bottoming out of the U.S.
economy in the fourth quarter. We anticipate the recovery to begin early next
year, barring any further major acts of terrorism on U.S. soil. And, given the
positive effect of aggressive interest rate cutting by the Federal Reserve and
the executive and legislative branches' stimulative fiscal policies, decent
economic numbers should materialize early in the second quarter.
Taiwan's economy should hit bottom in the first quarter. Its recovery, however,
will not be as quick because of structural problems. For one thing, a stalemate
with China has prevented lifting of various restrictions on economic relations
and led to the export of Taiwan knowledge and skills to the mainland. In
domestic politics, some time will be needed to adjust following the formation of
a new parliament and cabinet in February. Since no political party is projected
to win a majority in upcoming parliamentary elections, it is widely anticipated
that a coalition government will have to be formed for the first time in Taiwan.
As a result of such factors, we expect the economy will pick up slowly, with
noticeable momentum only in the latter part of next year.
With the TAIEX badly battered over the last two quarters and liquidity plentiful
after numerous interest rate cuts by Taiwan's central bank, our strategy is to
be almost fully invested and seek short-term trading situations in the run-up to
parliamentary elections in early December. From then until formation of a new
cabinet in February, the political inertia resulting from a lame duck government
could produce some market weakness. We will be prepared to increase our cash
position by that time and will be looking for buying opportunities heading into
Chinese New Year in February. The Fund's portfolio will remain well-diversified
in fundamentally driven stocks.
We appreciate your support and look forward to discussing our market outlook and
portfolio strategy with you in future reports.
Respectfully submitted,
/s/ Michael Ding
-----------------------
Michael Ding
President
November 1, 2001
PORTFOLIO HIGHLIGHTS
Three Months Ended September 30, 2001
KEY STATISTICS
Change in N.A.V. ($5.24 to $3.90) -$1.34
Total Net Assets $127.4 Million
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SECURITY CLASSIFICATION
Value
Percent of Net Assets (000)
--------------------------- ------------
Common Stocks 85.63% $109,108
Short-term Investments 14.46 18,422
-------- ---------
Total Investments 100.09 127,530
Liabilities Less
Other Assets -0.09 -111
--------------------------------------------------------------------------------
Net Assets 100.00% $127,419
================================================================================
TEN LARGEST HOLDINGS
Percent of
Company Net Assets
--------------------------------------------------- ----------------
Taipei Bank 7.15%
Hon Hai Precision Industry Co., Ltd. 5.55
Chunghwa Telecom Co., Ltd. 5.10
Cathay Life Insurance Co., Ltd. 4.42
United World Chinese Commercial Bank 4.39
Synnex Technology International Corp. 4.08
Microstar International Co., Ltd. 3.95
United Microelectronics Corp. 3.86
Sonix Technology Co., Ltd. 3.77
CMC Magnetics Corp. 3.33
--------------------------------------------------------------------------------
INDUSTRY DIVERSIFICATION
Percent of
Net Assets
--------------------------------------------------- ----------------
Banking 20.38%
Electronics 16.50
Semiconductors 9.74
Communications Equipment 7.91
Telephone Services 7.90
Other Financials 5.38
Retailing 4.08
Computer Services & Software 3.08
Transportation 2.33
Food 2.16
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THE R.O.C. TAIWAN FUND
www.roctaiwanfund.com
Manager:
International Investment Trust Company Limited
17th Floor
167 Fuhsing North Road
Taipei, Taiwan, Republic of China
Telephone: 886-2-2713-7702
Fax: 886-2-2717-3077
Officers and Trustees:
Theodore S. S. Cheng, Chairman and Trustee
Michael Ding, President and Trustee
Daniel Chiang, Trustee
Ed-ward B. Collins, Trustee and Audit Committee Member
Da-vid N. Laux, Trustee and Audit Committee
Member
Yung-San Lee, Trustee
Alfred F. Miossi, Trustee and Audit Committee Member
Robert P. Parker, Trustee and Audit Committee Member
Peggy Chen, Chief Financial Officer, ~Treasurer, and Secretary
Custodian:
Central Trust of China
49 Wuchang Street, Sec. 1
Taipei, Taiwan
Republic of China
Transfer Agent, Paying and Plan Agent:
State Street Bank and Trust Co.
P.O. Box 8200
Boston, Massachusetts 02266-8200
U.S.A.~Telephone: 1-800-426-5523
U.S. Administrator:
Citigate Dewe Rogerson Inc.
1440 Broadway, 16th Floor
New York, NY 10018 U.S.A.
Telephone: (212) 688-6840
U.S. Legal Counsel:
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, NY 10019-6064
Telephone: (212) 373-3000
For information on the Fund, including the NAV, please call toll free
1-800-343-9567.