Too much money chasing too few stocks has long been a core problem in the Taiwan stock market. What can the government do to increase the chips at play in the bourse?
Many corporate heads complain that it is hard to get listed on the Taiwan stock market. To simplify the approval process, as well as to prevent rumors and corruption, in January of this year, the Securities and Exchange Commission (SEC) reduced the listing approval committee membership from 90 to 15. It has also tried to make the process more open and transparent. The goal is to attract more interested firms to apply.
Going public
Not only is the government interested in attracting more firms to the stock market, companies are also anxious to be listed. CPA Josephine Peng notes that in the last year or two there has been a noticeable increase in the number of companies asking her firm to bring their accounting practices up to the standards required for listing.
"In the past, companies that really made money were not interested in listing. But having seen other firms raise capital in the market, and doing so far more economically than borrowing from a bank or plowing back one's own capital, naturally few entrepreneurs remained unmoved," she says.
Further, in the past, seeking to avoid the law-taxes, labor and environmental regulations, restrictions on investing in mainland China-many businesses preferred to remain small scale, with one boss setting up several different companies. Today, to meet listing requirements, businessmen are doing everything they can to expand, including mergers and alliances.
In the recently concluded Third Annual Conference on Small and Medium Enterprises, Li Chang-yi, director-general of the Medium and Small Business Administration, talked about the advantages of over-the-counter listing. He urged firms to stop the practice of keeping two sets of books if they wanted to meet market requirements: "You'll earn a lot more if you can list successfully than by evading taxes!"
Fee, fi, fo, fum... investors beware
With the enthusiasm for listing just underway and with no end in sight, more than 200 firms have requested SEC guidance for over-the-counter listing. "I hope that by 2000, the number of listed firms in Taiwan will reach the current level in Hong Kong," says an SEC official. But it takes two years of guidance to become listed, and another year to get approval for over-the-counter trading, and this seems a little slow for the Taiwan stock market, which urgently needs to expand to absorb incoming capital.
Another path to expanding the market is the so-called "liberation of official stock"-public listing of state-run enterprises.
"People have been arguing about privatization for years now. In fact, the results have been limited," says an SEC official. Thus far only six small enterprises have been privatized. In the National Development Conference held last year, participants agreed to aim for complete privatization of public enterprises within five years. With the recent upswing in the market, "official stocks" can command higher prices, and at the same time absorb demand and moderate the market, so this might be a good time.
However, the liberation of official stocks has always been bad news for prices of already listed stocks. "If all state enterprises were privatized, the total value of the stocks would be NT$15 trillion," estimates Thomas Yeh of the Council for Economic Planning and Development. The current value of the 300-plus companies now listed is only NT$8 trillion. Obviously privatization would have a powerful impact by drying up capital, thus driving down all stock prices, so the officials responsible have been very cautious.
The trick to picking good stocks
In illustration of his point, Yeh points to the expected privatization at the beginning of next year of the "Big Three"-China Petroleum, Taiwan Power Company, and Chung Hwa Telecom-when 30% of each company will go up for sale. The total value will exceed NT$1 trillion. To avoid washing out the market, the CEPD has recommended following the example of Singapore's telecommunications privatization: Before listing on the stock market, first give the general public a chance to buy securities.
Another privatization plan being closely watched is that for the three provincially owned banks. Plans were made for this in 1996, but, because the market had been down, it would have been impossible to earn the desired price, so the plan was held off until now. Since the market is now up, and many provincial assemblymen who had previously opposed the plan have changed their attitudes as a result of the proposal to freeze the provincial government's functions, the plan is moving forward again. It's just that the sudden influx of stock will be a blow to share prices of existing stocks, and it will be hard to return financial stocks to their former level of hundreds of dollars per share.
No matter what, says Chengchih University finance professor Yin Nai-ping, idle capital is like floodwater: It is more important to channel it than to obstruct it. If the government raises interest rates or issues more public debt to soak up capital, such measures will damp the expected economic resurgence and will be deleterious to economic growth. Privatization of state enterprises, on the other hand, would also shore up government coffers as well as improving the management of these enterprises, killing many birds with one stone and making the plan essential.
If the volume of stocks on the market were sharply increased, then it would be much harder for stock prices to be manipulated, making things more secure for investors. But faced with a confusing list of new companies listed on the market and over-the-counter, how should investors pick stocks and find the gems?
"Choose blue chip stocks for companies with a strong financial base, a low P-E ratio, stable profits, and three years of continuous growth," say scholars. This method of selection won't yield windfall profits, but these stocks will be durable and reliable.
Of course, unpredictable things can happen. Stocks can go from boom to bust overnight, just as animal husbandry and food processing stocks have all fallen with the outbreak of hog foot-and-mouth disease. Investors must stay cool and not sell in a panic; that's the only way to protect oneself. As long as one does not blindly chase prices up at the beginning and rush in when the market is high, and as long as the stocks one purchases have worth, then sooner or later they will pay off.
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When the Big Three state enterprises are partially privatized, the effects on the stock market are not to be overlooked. The photo shows employees of Chung Hwa Telecom, a state monopoly, protesting privatization legislation. (photo by Pan Chung-an)
