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Market measures miss the point

Premier Frank Hsieh (謝長廷) told business executives on Thursday morning that the government would not inject funds directly into the stock market but instead work to improve investor sentiment. He was responding to concerns over the recent fall in equities, amid negative factors that have prompted investors to move to the sidelines.

The benchmark TAIEX has fallen by around 6 percent this month and about 7 percent so far this year, making it the worst performer in Asia. In comparison, South Korea's KOSPI Index has jumped more than 30 percent, Japan's Nikkei has risen 15 percent and Singapore's Straits Times Index is up 8 percent.

But while Hsieh convened an emergency meeting on Thursday evening and presented four new measures aimed at shoring up investor confidence, the market's response has been lukewarm.

The measures would include revising rules to encourage financial holding companies to buy back more shares, raising overseas investment ceilings for fund management companies and insurance firms if they invest more in Taiwan's stock market, lowering inheritance and gift taxes to allow individuals to keep more assets in the capital markets and lifting limits on bank loans to certain industries -- such as the liquid-crystal-display sector -- to help facilitate industry consolidation.

While promoting these measures, the Cabinet signaled it would not interfere in the free-market mechanism, as it has done in the past. And yes, the measures are expected to help liberalize domestic capital markets and sharpen the competitive edge of Taiwan's manufacturers. But the Cabinet appeared to miss the point.

Investors are more concerned about slowing GDP growth and the depreciating New Taiwan dollar. They are also worried about an avian-flu pandemic, inflationary pressure from higher energy prices, as well as corporate earnings reports. Most importantly, investors aren't likely to return to the market as long as the political stalemate persists ahead of December's local government elections.

Take the weak NT dollar. Since there's no sign of a pause in the US Federal Reserve's drive to raise interest rates, the interest-rate spread between the US and Taiwan will expand further and keep the NT dollar weak against its US counterpart. In Taiwan, the central bank's attitude toward a weak currency seems quite obvious: Governor Perng Fai-nan (彭淮南), told business leaders again on Thursday that the bank won't buy the NT dollar to stem its fall.

The central bank probably prefers a weak NT dollar -- which hit a near one-year low of NT$33.726 last week -- to help increase export competitiveness. But in doing so, it undercuts foreign investors' interest in Taiwanese equities and drives Taiwanese to park their funds in foreign currencies.

With continued foreign-fund outflows, the Cabinet thus turned to insurance companies, to ask them to increase their investments in local stocks. But these firms quickly threw cold water on the proposal as no insurer would want to invest in a market with such poor returns.

If the Cabinet wants to address concerns over declining equities, it would do better to think clearly about why investors have lost confidence. A Morgan Stanley report released on Friday estimated the TAIEX's downside to be in the range of 3 percent to 5 percent, and predicted a rebound of approximately 8 percent to 10 percent by the end of the year. If the Cabinet cannot provide a cure for the ailing market, the most likely scenario will be exactly as the report's title suggested: Rebound Likely, But Not Recovery.
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