After President Ma Ying-jeou (馬英九) was elected, Taiwan’s stock market plummeted nearly 20 percent, a greater percentage than the US stock market, which has been severely hurt by subprime mortgages. The Taiwanese market has dropped by approximately 20 percent to date.
Ma’s government has tried to make the falling market a moral issue while encouraging life insurance funds worth up to NT$8 trillion (US$263.2 billion) and more foreign investors to enter the market. Ma also came up with five strategies to boost the market. However, both institutional investors and academics believe that the effects of these strategies will be limited.
There is not one perfect way to save the stock market because the issues involved are complex.
For example, globalization has created a global economy with an economically level playing field. Therefore, when a large economy such as the US suffers economic difficulties, all the others suffer as well. Soaring oil prices and inflation are turning stock markets worldwide into bear markets. These problems are like a virus that has infected the global economy and economies are either slowing down or rapidly heading into recession.
Aside the market fundamentals, investor confidence and the efficacy of government policy are what primarily affect stock markets. Market fluctuations are the result of changes in investor confidence and these changes are the major indicator of future economic growth and confidence in the overall economy.
Ma’s campaign slogans, such as “Everything will be alright as long as Ma is elected” made people lose themselves in a bull market without knowing that a bear market was waiting for them.
The Chinese Nationalist Party (KMT) has been unable to realize the true danger of inflation, only recently releasing their counter policies. This has upset investors and consumer confidence has dropped rapidly.
Ma’s lack of timely response was a warning for investors to pull out of the market.
Council for Economic Planning and Development Minister Chen Tain-Jy (陳添枝) has said that Ma’s government has been unable to fulfill the hopes of investors. This reflects how the Taiwanese lack confidence in the government’s ability to solve administrative and economic problems. This is one of the key reasons for the massive drop in Taiwan’s stock market.
On several occasions, Ma has tried to drum up investor confidence. Investors, however, have not responded.
But more must be down to boost investor confidence to save the market. This is of paramount importance.
The government must use policy instruments to its advantage. However, the KMT must look at the real international economic problems and come up with effective strategies for improving short to long-term investment. This is the only way Ma can help the economy through policy.
Many have criticized the government’s policies as outdated, thought up by an out-of-date government. This shows that the KMT’s election slogan “We are ready” was indeed only that, a slogan that has nothing to do with actual policy or ability. Outdated policies are not enough to save the market now.
We must also realize that government market intervention is a double-edged sword that can actually hurt the market instead of helping it.
The opposite of government intervention is letting the market adjust itself. Good government intervention include policies that can improve the investment environment, such as policies beneficial to investors, the relaxation of restrictions and policies aimed at establishing more transparent systems. More policies like these should be drawn up and implemented.
Policies that could help save Taiwan’s stock market include those aimed at encouraging Taiwanese businesspeople in China to return to and invest at home, reducing business income tax, reducing or abolishing the legacy tax and other policies aimed at encouraging long term investment in Taiwan.
We do not want to encourage speculative investors. Such investors interfere with the stability of the market and Taiwan does not need that.
The Taiwanese market needs to move toward a free market that is transparent and healthy, one that can attract more long-term investors.
Jeff Wu is a doctoral candidate and a manager in the service industry.
Translated by Drew Cameron
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