Taiwan's Stock Market Under Siege,Waiting for the Rebound

To rescue the tumbling market, the Executive Yuan decided to cut the securities transaction tax rate by 50% for the next six months. In addition, it has put forward ten major measures, including raising the subsidy on housing loan interest, monthly assistance of up to NT$6,000 for 450,000 "near-poor households," and assistance for the purchase of electric bicycles and other energy-saving, carbon-reducing products. With these actions plus the recently launched NT$53.8-billion program to expand domestic demand, the government expects to inject NT$180.9 billion into the budget. The Council for Economic Planning and Development predicts that the economy will hit bottom sometime in the fourth quarter and that the government's economic revival plan will, in due course, show results.

From January to May 20 of this year, before the new government took office, Taiwan's stock market stood out as the best of the 12 Asian stock markets owing to the gamble by foreign investors and the public on the Ma government's cross-strait liberalization policy. The rate of return on investment was 11.68%, the best in Asia. The NT dollar rose 5.8% against the US dollar, again the best in Asia.

Unexpectedly the market took a sharp turn downward within three months. The large-cap index tumbled more than 3,000 points from its high of 9,309 for a percentage loss that was behind only China and Hong Kong in Asia. What went wrong with Taiwanese shares?

The stock market is like a thermometer for the economy. There must be strong fundamentals to support a bull market. Today the threat of an interlinked global recession has spread from the West to Asia and Taiwan cannot escape the consequences. Business operations are under severe pressure, and this is what has triggered the setback.

This July the value of foreign orders for Taiwanese manufactured goods was the lowest since the SARS epidemic. At the end of August, second-quarter reports for domestic and foreign conglomerates were published, and the news was not good.

Just when investor confidence was at a low point, president Ma Ying-jeou gave an interview to El Sol de Mexico frankly stating, "It won't be until 2016 that the economic growth rate will hit 6%." This was tantamount to announcing that the campaign slogan that the economy would "improve once Ma is in office" would have to wait until later to be realized. It was the last straw for Taiwan's collapsing stock market.

Added to this was the US sub-prime mortgage crisis, the near collapse of Fannie Mae and Freddie Mac, the bankruptcy of Lehman Brothers, and the near failure of insurance giant AIG, which was propped up by emergency loans of US$85 billion from the US Federal Reserve. Western institutional investors withdrew their funds from newly emerging Asian markets in droves to bolster their own finances. As of early September, foreign institutional investors had net sold Taiwan stocks with a market value of NT$300 billion. Prior to this, foreign investors had held Taiwanese securities worth NT$5 trillion, or 25% of the value of Taiwan's securities markets.

The populace, which had pinned its hopes on the new administration taking office and turning around the political and economic situation, has been feeling trapped holding expensive shares they cannot sell, and complaints about economic policy have surfaced.

In fact, faced with the turbulence in the last six months of global capital markets that extend everywhere and whose movements are closely linked together, world leaders are all racking their brains. It is definitely difficult for politicians to make good on their election promises.

A survey of the Asian neighborhood offers a few cases in point. Former Japanese prime minister Yasuo Fukuda sent shockwaves through the international political world when, physically and mentally exhausted and unable to come up with an effective economic recovery program, he resigned without warning less than a year after taking office. President Lee Myung-bak of South Korea admitted that the "747" campaign slogan would have to wait five years to bear results and personally went on TV to make a public apology. In Thailand, when street demonstrations demanding the premier's resignation led to bloody clashes, the Thai stock market and the bhat went into freefall.

Nevertheless, even if violent storms buffet a ship, the captain who is leading the passengers and crew through the open sea does not have the right to be pessimistic but must calmly grasp the wheel and steer a way forward.

Export trade has always been the engine behind Taiwan's forex earnings and economic growth rate. Situated between the two major economic blocs of mainland China and the US, Taiwan is drawn into the US economic downturn and also affected by the loss of hope engendered by the fear that China's high economic growth rate is a thing of the past. The media and economic scholars all frankly state their opinion that the Ma Ying-jeou government cannot merely use short-term tools like a reduction in securities transaction tax, but must come up with policies aimed at the next round of economic development, to rebuild foreign and domestic investor confidence in Taiwan. It should also inspire listed companies to be self-reliant, to weather this wave of recession and to win the market's approbation with brilliant operating performance.

The Ministry of Economic Affairs has reported that in the first half of 2008, 63 Taiwanese SMEs that had gone to China have returned home. Industrial parks that have lain dormant for many years are also showing signs of reviving. Hon Hai subsidiary Foxconn, and the Want-Want group, will list on the Taiwan Stock Exchange. The return of the capital of Taiwan enterprises will be of enormous benefit to lifting the economy. In the end, if Taiwan can get ahead of the curve when the global economy recovers, a stock market that is the showcase for the economy will have nowhere to go but up!

Global stock market trends, Jan-Sep 2008