When the National Stabilization Fund
The stabilization fund is an NT$500 billion fund put together from the government's postal savings, postal life insurance, labor pension and government employee pension funds. The idea was to maintain the stability of the stock market and the financial system when major upsets hit the country. By buying bluechip shares, the fund would boost investor confidence and invigorate stock market trading.The fund should have been a protective mechanism for extraordinary times. Instead, it has become a monster trampling on market functions.
During the KMT era, DPP lawmakers criticized the fund as protective armor tailor-made for the KMT. But the new DPP government has been even keener to use the fund, which started buying when the TAIEX was in the 8,000s. As the market continued to slump, the government sank deeper into the quagmire. Government intervention is like drinking poison to quench your thirst. It has paralyzed the market's capacity for self-adjustment.
We believe the government should stop using the stabilization fund, at an appropriate time, for the following four reasons:
First, it interferes with normal market functions. Except when the country faces major threats, the government should not flippantly activate the fund to protect its hold on power.
Secondly, the fund is the people's money. No one expects the fund to turn a profit, but as of yesterday, the fund has pumped NT$170 billion into the market and has sustained NT$40 billion in paper losses. Even though they have not been realized, these losses will have a negative impact on the fund's resources. The people of Taiwan will be the ones who have to bear the brunt. In this sense, the government is not fulfilling its responsibilities as a manager of public funds.
Also, the fund's movements have a tremendous impact on the market, as does those of any other major investor. Prosecutors are now investigating reports of insider trading in the fund's management. Yesterday, lawmakers from the Legislature's Finance Committee inspected the details of the fund's share holdings, leading to an immediate scramble by investors to sell before the closing bell. The lawmakers' inspection was perfectly legal, but it was unwise for them to stick their noses into the fund's operations, thereby increasing the possibility of insider trading.
And finally, to reinforce its presidential recall drive, the KMT has been dumping its shares in the market to depress prices and create the perception of poor government. This has only aggravated Taiwan's political instability.
The stabilization fund has deviated from its original purpose. It has hampered market functions, twisted share prices, boosted unfair competition and encouraged insider trading. Share prices, meanwhile, have continued to fall and have seriously damaged the government's credibility. These negative effects have soured the very nature of the fund. Think about what a NT$500 billion fund could have contributed to the country if it were invested in economic development or improving the financial system.
To salvage the stock market, the government will first have to salvage investor confidence, improve the economic environment and stabilize the political situation. Another dose of stabilization fund morphine may temporarily stop the pain, but it will not cure the disease.
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