Sun, Sep 07, 2008 - Page 8 News List

EDITORIAL: Short-term action, long-term worries

Increasing calls from investors, pundits and politicians for immediate government action to help prop up the sagging stock market show that the market has little confidence.

From March 17, when the stock market started to climb before peaking on the eve of the presidential inauguration, investors hoped that things would take a turn for the better and that a rise of 1,289.74 points, or 16.11 percent, on the benchmark TAIEX at that time was only the first indicator of good news to come.

But since May 20, when President Ma Ying-jeou (馬英九) took office, the TAIEX has plunged by 2,761.6 points, or 30.46 percent, and penetrated both 10-year and 20-year moving averages to close at 6,307.28 points on Friday. This was a fresh two-year low, with market capitalization for all listed companies losing a total of NT$7.4 trillion (US$232.2 billion).

Ma’s remark last week that his “6-3-3” economic policy could not be delivered until 2016 — the final year of a second term in office if he were re-elected — became the last straw for a sinking market as investor confidence fell apart.

With margin calls placing pressure on the market and most local investors choosing to wait in the wings for the time being, and with foreign investors redirecting funds from Asian equity markets — including Taiwan — to home markets amid global uncertainty, it is clear that the market’s bear run will continue for an extended period.

In response to growing public criticism at their do-nothing approach, government officials said they would have an action plan to support the market ready this week, with measures possibly including the use of government funds to purchase a substantial amount of shares, as well as tax exemptions or tax cuts on stock transactions.

There is a strong political case to be made on this point, because many salary earners were drawn into the stock market because of their belief that Ma could fulfill his campaign pledges.

But there is a difference between cutting investor losses and boosting market confidence. It is also clear — if perhaps unwelcome — that these measures cannot be expected to change fundamentals; government intervention will likely only serve to prop up the market temporarily.

The sagging market reflects a bigger picture of global slowdown amid lingering financial turmoil, inflation pressures and exchange-rate volatility. But it is foreign investors continuing to trim positions to meet fund redemptions in home markets that accounts for most of the plunge in local equities.

Remarks by Minister of Finance Lee Sush-der (李述德) last week that investors should take responsibility for investment decisions, and that the government should not shoulder investor losses, is economically accurate but politically incorrect. What he didn’t say was that action to support the market would favor people who invest and not those who don’t.

No one should expect the market to rebound just because of a government “action plan.” The market will eventually act to correct itself as long as the economic outlook is positive and policy improves confidence in the government’s ability to manage.

What investors and the government should worry about is whether a bear run will hurt other capital markets and further undercut domestic consumption before posing a threat to the economy as a whole.

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