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Warfare may lead to fund intervention

The National Stabilization Fund (國安基金) could be activated to intervene in the local stock market once the US' war against terrorism breaks out, but pundits yesterday strongly questioned the use and effectiveness of intervention.

President Chen Shui-bian (陳水扁) held a national security meeting on Thursday to discuss the potential impact of US military activity.

Besides the current measures stipulated by the administration -- including halving the daily share price down-limit from 7 percent to 3.5 percent and lowering the interest rate to 0.5 percentage point -- Chen requested further steps to stabilize the stock and foreign exchange markets.

Local Chinese-language media reported that should a war break out, activating the stabilization fund to intervene the local stock market could not be ruled out.

The question is whether intervention is appropriate as NT$100 billion of the NT$500 billion fund has already been lost.

"A war ... could fit within the regulations of using the National Stabilization Fund, which is to cope with an emergency situation, either domestically or international, that might strongly affect the domestic stock market," said Norman Yin (殷乃平), a banking and finance professor at National Chengchi University.

"However, the timing and magnitude of such intervention should be very prudent. The Executive Yuan does not have the expertise to determine when and how to intervene in the market. The task should be left to securities professionals."

According to Yin, more than NT$1 trillion (US$30 billion) worth of foreigners' holdings might be unloaded during an emergency. "Does the stabilization fund have the capacity to [support such a sell-off]? If the answer is no, then we should be more careful about activating the fund," he said.

"After all, the fund has generated huge losses since last year by borrowing money from the banking sector. All the losses and interest burden are going to be part of our fiscal deficit."

Other pundits agreed.

"The government should not intervene in the stock market, especially when we do not know how long the possible war will last and what damage it might reap," said Yophy Huang (黃耀輝), an associate research fellow at the Chung-hwa Institute for Economic Research.

"Since Taiwan is a small economy and easily affected by international factors, Taiwan should act just like other countries and let its markets reflect what is really going on.

"If we intervene in the market, it might mislead local investors on share prices which did not reflect the stock's intrinsic value," Huang said.

Another factor that worried Huang is that the stabilization fund, along with the four government funds, has failed to revive the market since it first intervened in the market last year.

"The general public does not have faith in intervention. Why bother to lose [more] money on something that is not going to work? If the situation is really bad, what the administration could do is to close the market for a day or two. ... It's simply not wise to do things against market mechanisms," Huang said.
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