May 19, 2010, 12:06 AM EDT

(Adds president’s comments in second, 11th paragraphs.)

May 19 (Bloomberg) — Taiwan’s economy may have expanded at the fastest pace in 20 years last quarter on surging exports to China, as Goldman Sachs Group Inc. and Barclays Plc forecast the central bank will raise interest rates next month.

Strengthening exports, which make up more than half of the economy, spurred companies including Taiwan Semiconductor Manufacturing Co. and Quanta Computer Inc. to boost investment and hire workers, driving the jobless rate to a 14-month low. The island’s rebound prompted the central bank to begin draining cash from the financial system to avert an asset bubble.

“Taiwan is grappling with a very strong recovery that’s significant enough for policy makers to shift to a tightening stance,” said Wai Ho Leong, a Singapore-based economist at Barclays who forecasts a 12.5 basis-point increase in rates at the central bank’s June meeting. Shirla Sum and Enoch Fung of Goldman Sachs also predict a boost in borrowing costs. A basis point is 0.01 percentage point.

2010 Forecast

Vice Economic Minister Lin Sheng-Chung said last month the government may raise its 2010 gross domestic product forecast from the current 4.72 percent as the economy accelerates. The Central Bank of the Republic of China (Taiwan) has kept its benchmark interest rate at a record-low 1.25 percent since March last year to encourage consumer spending and investment.

The rebound and a planned trade accord with China have attracted overseas investors, spurring Taiwan’s dollar in April to its biggest monthly advance since September. The currency reached NT$31.269 per U.S. dollar on April 27, the strongest since August 2008. The local currency gained 0.1 percent to NT$31.950 against its U.S. counterpart as of 11:51 a.m. local time, according to Taipei Forex Inc.

Even so, Lucas Lee, an economist at Mega Securities Co. in Taipei, said the central bank is likely to keep borrowing costs unchanged due to concern that budget-deficit-reduction measures in Europe may undermine the global recovery.

“It’s unclear how long and how big the deficit problem will last, so we certainly don’t expect the central bank to move rates next month,” said Lee. “Given Taiwan’s GDP growth will slow later in the year due to a base effect, we expect a tightening in the second half of next year.”

Ma’s Stance

President Ma, who abandoned his predecessor’s pro- independence stance after taking office in May 2008, has pushed for the trade agreement with China to prevent Taiwan from being “marginalized” after a Chinese accord with the 10-member Association of Southeast Asian Nations took effect this year.

The proposal sparked opposition demonstrations amid concern China may boost its influence over Taiwan. The two have been ruled separately since Nationalist troops fled to the island after losing a civil war to Mao Zedong’s Communists in 1949.

Ma reiterated today that the accord with China won’t harm the island’s “sovereignty.” He said a reduction in cross- strait tensions will encourage the mainland “in the long run” to remove the more than 1,000 missiles it has aimed at Taiwan to prevent the island declaring independence.

Exports to China, the island’s biggest trading partner and No. 1 overseas investment destination, soared 62 percent in April from a year earlier, after an 82 percent gain in March.

Higher Revenue

That prompted Taiwan Semiconductor, the island’s biggest company by market value, to forecast revenue will rise this quarter to a record NT$100 billion ($3 billion) to NT$102 billion. It reported first-quarter net income of NT$33.7 billion, surpassing analysts’ estimates.

Quanta Computer, which includes Apple Inc. and Acer Inc. among its customers, said in April that sales are expected to rise this quarter as companies upgrade to models running Microsoft Corp.’s newest Windows operating system and Intel Corp. releases a new processor for laptops.

The recovery also brought an exit from deflation, with consumer prices rising 1.3 percent in April, a fourth consecutive increase. Crude-oil prices have risen about 20 percent in the past 12 months, boosting transport costs in Taiwan, which imports 99 percent of its energy. Central bank Governor Perng Fai-nan said two months ago the bank won’t sacrifice price stability for economic growth.

Chinese Tourists

Hiring by electronics companies and retailers, who are benefitting from rising numbers of Chinese tourists, helped drive down the unemployment rate to 5.64 percent in March, the seventh monthly decline after it surged to a record 6.04 percent in August. The number of workers taking unpaid leave fell to 1,486 as of the end of April after peaking at 238,975 in February last year, Premier Wu Den-yih told reporters last week, a sign of diminished slack in the economy.

Chinese visitors to Taiwan in the first quarter outnumbered Japanese for the first time on record as relaxed rules spurred travel to an island off limits to mainlanders for 60 years.

The government estimates the so-called Economic Cooperation Framework Agreement with China would increase GDP by 1.65 to 1.72 percentage points annually, spurring exports and creating more than 260,000 jobs. Exports would rise as much as 5 percent a year and imports by 7 percent, it says.

–With reporting by Weiyi Lim in Taipei. Editors: Michael Heath, Stephanie Phang

To contact the reporters on this story: Chinmei Sung in Taipei at . Jay Wang in Singapore at

To contact the editor responsible for this story: Chris Anstey in Tokyo at

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