Taiwan's business community, which had seemed to be in good shape in spite of Asia's financial debacle, found itself shocked by the news of a number of listed companies encountering difficulties at the beginning of November. The news led the stock market into a four-day decline during which the benchmark index shed more than 320 points. Rumors have been flying. The severity of the situation has prompted the government to take urgent action to stabilize the market, even going so far as to remind foreign and local banks that they are all facing the same difficulties and urging them not to cut and run.
At the beginning of November, in the opening scene of the current crisis confronting Taiwan's listed companies, Central Bills Finance (CBF), Chinese Automobile Company (CAC) and the New Magnitude Group all either bounced large checks or defaulted on stock transactions.
On November 3, CBF bounced checks worth more than NT$700 million. Hua Nan Bank, First Commercial Bank and the Medium Business Bank of Taiwan then stepped in, providing the necessary capital and taking over the operations of the company. However, when Hua Nan sent employees to examine the assets of CBF, they discovered numerous flaws in the credit checks CBF had conducted on its clients. The value of guarantees had been seriously overestimated and some of the companies on whose behalf it had issued bills of finance had already folded or were mere shell corporations. Now the Ministry of Finance (MOF) has decided to shut down the company, at which debts exceed assets.
Cash flow difficulties at several of the major holdings of the New Magnitude Group, itself a CBF board member, and at the Panvest Group's CAC, also led to defaults on stock transactions. In fact, since November 2, defaults at these two companies total more then NT$1.1 billion.
As a result of the problems at CBF and these other two business groups, many other so-called "land mine" shares have exploded. Kuoyang Construction almost defaulted on a stock transaction on November 5. Problems on such a large scale don't come into existence overnight, nor are they easily resolved. Hou Hsi-feng, chairman of the Hanyang Group which owns Kuoyang, bounced a check on November 9, and announced his resignation from his position with the group the next day.
On November 5, Hung Fu Bills Finance found itself with a NT$1.4 billion hole which urgently needed filling. Now the MOF is negotiating with four financial institutions about taking over Hung Fu's operations in return for two-thirds of the seats on its board.
Next, on November 16, Taichung Machinery Works and a subsidiary defaulted on stock transactions of more than NT$200 million and bounced checks also worth more than NT$200 million. Then, at the end of the month the Kuang Shan Group defaulted on more NT$8.2 billion in stock transactions over a period of three days. The group's director, Tseng Cheng-jen, served concurrently as chairman of the Medium Business Bank of Taichung, where investigators from the Central Bank of China (CBC) discovered he had granted inappropriate loans of more than NT$7 billion to the group. This revelation set off an NT$50 billion run on the bank.
Making matters worse was the fact that problems had already surfaced in October: Fan Fang-kuei, the former chairman of Tong Lung Metal, had misappropriated company funds to cover personal losses on the stock market and overseas investments, and An Feng Steel had bounced checks worth NT$170 million. And things seemed to be getting worse as time went on.
As a result, investors have even less confidence in a stock market which has already been declining for several months, and rumors are flying. Share prices of the firms which comprise the Tuntex Group have collapsed with a thud. Three of these firms-Tuntex Distinct, Chien Tai Cement and Grand Formosa Regent Taipei-even called a press conference at which Chen You-hao, the chairman of the group, stressed that the group's finances are healthy. He admitted, however, that there would be some belt tightening in the future, including calling a halt to Tuntex Distinct and Tung Meng Develop-ment's forays into the construction business, making a serious effort to pay down the group's debt and temporarily slowing overseas investment and work on Taiwan's seventh naphtha cracker.
The domino effect
Ting Ke-hua, vice chairman of the Securities and Futures Exchange Commission (SFEC), says that given the region's financial crisis, it doesn't take much to create problems at companies which have expanded their credit through margin lending for stock transactions and for which assets and finances are highly leveraged. Yang Yi-chen, chairman of the Ministry of Economic Affairs' (MOEA) Small and Medium-sized Enterprise Guidance Center, notes that the companies experiencing these crises do not have problems with their core businesses. The problems are with outside investments and are particularly prevalent at large companies which have expanded their credit to put money into the stock market.
This string of "land mine" explosions has prompted some banks to cut off credit to bills finance companies, request early repayment of loans or more security from other firms, and reduce their stock-secured loans business. Chen Sung-hsing, chairman of Chung-hwa Credit Rating, states that in times of recession, banks, especially privately-run banks which are responsible to shareholders and must bear the burden of the risks they take, must tighten credit.
Financial institutions are already taking measures to protect themselves, and the business community is on edge. The Executive Yuan has been working to implement five emergency relief measures which were announced on November 3. These measures will offer financial assistance or an extension of loan repayment periods to firms experiencing a cash crunch, and will arrange takeovers for financial institutions which are in trouble. In addition, the MOF has led the drive to assemble a cross-departmental "Task Force on Capital and Operational Assistance to Enterprises." Finally, the Executive Yuan has urged government bodies to speed their implementation of plans to increase domestic demand.
Now in addition to shutting down CBF, the MOF has taken over the operations of the Medium Business Bank of Taichung and arranged for NT$100 billion in funding from nine other banks to get it through the crisis. As for SMEs, the MOEA and the central bank have provided NT$40 billion and NT$30 billion, respectively, in emergency lending. The central bank has also expressed the hope that banks will work with it to lower interest rates and ease liquidity on the island's money markets.
Stabilizing the stock market
At the same time, in order to stabilize a stock market battered by the news of financial crises at many firms, a stock market stabilization committee headed by the MOF held its first meeting on November 16. The committee has confirmed that it has arranged for a total of NT$283 billion from a number of sources to buy shares. The sources of this money include postal deposits, the civil-service and labor pension funds, the labor insurance fund, the government-run banks and insurance companies.
Wu Huei-lin, a research associate at the Chung-Hua Institution for Economic Research, is critical of these "shoring up" measures. The government's relief measures are in obvious violation of free-market principles and encourage firms to develop an unhealthy reliance on government aid. Wu Jung-yi, head of the Taiwan Institute of Economic Research, concurs, stating that the government should not be rescuing everyone, but rather allowing those firms that should fail to fail.
Will the government's relief measures interfere with the free market mechanism which allows unsound businesses to fail? Will it encourage businesses to embark on excessive and irresponsible expansion programs? Chou Tien-cheng, a professor of economics at National Chunghsing University, believes that the government had an obligation to act to limit the scope of the financial crisis. But at the same time it provides aid, it should also penalize the owners and managers of these companies. This is the only way in which it will be able to rebuild market principles and rules. Chou fears that now we must simply hope that companies can take advantage of the breathing space the relief measures provide to implement the necessary downsizing plans.
The issue of to what extent the government should involve itself is one which will generate much debate over the long term. At the November 26 meeting of the Executive Yuan, Premier Vincent Siew stressed that the win-win policy put forward by the Minister of Finance (in which banks will help industry and vice versa) was the correct approach. However, he pointed out that only firms whose operations are sound are worth saving. Siew expressed approval for the stronger monitoring of finances being undertaken by the relevant government bodies. He also stated that owners who take advantage of opportunities to set up empty shell corporations and appropriate company assets will be severely punished. Furthermore, he expressed the hope that ambitious, young, second generation entrepreneurs will lead their families' firms back into their core businesses and stop these money games.
Minister of Finance Paul Chiu has already directed the SFEC to investigate those listed companies which are known to be in financial crisis. Investigators are also looking into whether these companies were involved in stock manipulation and insider trading.
To address the root of the problem, the MOF has decided that beginning next year, a credit check will be a pre-condition for the issue of commercial paper and corporate bonds, and is urging the speedy passage of the laws governing the operations of bills finance companies.
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The government has recently implemented a number of measures aimed at stabilizing the local economy. The picture shows Minister of Finance Paul Chiu (center) announcing stock market stabilization measures at a press conference held on November 12.
(photo by Chin Tsan-wei)
