It's too soon to start celebrating a bull market

The TAIEX didn't let the public down at the start of the new millennium, breaking the crucial 10,000 mark by February. The local bourse has witnessed phenomenal growth so far this year on the back of a strong showing in foreign stock markets, buoyant optimism about future economic development, and a series of policies designed to boost the financial sector as we approach the the upcoming presidential elections.

But even though government officials and stock analysts have expressed confidence in this year's economic growth and insist the bullish market will continue, there still is some gloom lurking off the horizon.

Taiwan is seriously awash in short-term funds and must shoulder serious risk because of the nature of its major industries. We could mention that cross-strait tensions that could flare up at any minute, and then there is always the possibility of another global financial meltdown.

The oversupply of funds in Taiwan can be seen by the fact that the overnight rate recently dipped back to around 4.6 percent, a level that has only been seen before in 1987 and 1989, the two speculative periods in Taiwan's recent history.

The level on deposit of Central Bank of China (CBC, ??央銀|?/CHINESE>) negotiable certificates of deposit (NCDs) has fallen from NT$900 billion to NT$600 since the beginning of the year, just as net currency demand rose by about NT$300 billion for bonuses and other expenditures related to the Lunar New Year.

If the CBC continues to issue NCDs to take currency out of circulation, it is estimated that the amount held in NCDs will quickly climb to NT$1 trillion.

One trillion is the figure that Lii Sheng-yann (李3茷?/CHINESE>), director general of the banking department at the Central Bank of China, cited as the level of money oversupply within a month.

Some commentators have said that the present loose money supply may be of some benefit by the end of the year when a great demand for funds for private investment and public projects is expected.

The Directorate General of Budgeting, Accounting and Statistics (DGBAS, 主-p3B), estimates, however, that overall domestic fixed capital formation and private investment will only increase by NT$171.7 billion and NT$163.6 billion respectively this year -- showing that surplus savings of NT$1 trillion will widely overshoot what is required.

Moreover, if this NT$1 trillion finds its way back into the financial markets it will have a major effect on the market as a result of the monetary multiplier effect.

This shows that ultimately, the equivalent-amount money supply -- instead of a money base -- should be the basis for meeting demand.

The total market capitalization of the TAIEX reached NT$14.32 trillion after the market skyrocketed on Feb. 9, 21.6 percent higher than last year's level.

Dealers now say that daily trading volume levels of NT$320 billion are not excessive and assert that an average trading volume of NT$200 billion is reasonable.

The M2 money supply has only grown at a yearly rate of 7-8 percent, and one has to wonder if the CBC wishes to see so much money flowing into the stock market.

Further, the production and export of high-tech electronic, communication and information technology products may have quickly rebounded since last year's earthquake, but the direction of the industry and technological breakthroughs are still controlled by the US and Japan.