Sat, Aug 13, 2011 - Page 8 News List

Who really profits from government stock buy?

By Paul Lin 林保華

A number of big firms on Wall Street — and likely politicians in cahoots with them — took advantage of the recent US debt ceiling showdown, pressuring the US government to unleash a third round of quantitative easing. The firms managed to profit from this, while also stirring up the global market.

It is common for stocks to fluctuate and the trick is knowing how to ride the fluctuations to make money. This risk in stock markets means it is important for investors in Taiwan to be cautious and not rely on the state-owned National Stabilization Fund (NSF) to intervene and prop up the Taiwan Stock Exchange every time the waters get choppy.

The TAIEX shed 464 points on Aug. 5, and US markets suffered later that day, too, because of the combined actions of major international players. Who knows, the decision by Standard & Poor’s to downgrade the US’ credit rating may have been coordinated. It is difficult to say.

Following the TAIEX’s major slide, President Ma Ying-jeou (馬英九) called a press conference on Aug. 6 to boost confidence in the market, talking about healthy economic fundamentals and 5 percent economic growth. Some investors undoubtedly believed him and anticipated that the NSF would intervene to protect the local bourse.

Those who did, and who subsequently went bargain hunting when the markets opened on Monday, or those who decided to hold off on selling their portfolios, almost certainly ended up seeing their finances shrink before their eyes.

The TAIEX fell 300 points on Monday and another 400 before recovering on Tuesday. The exchange had already fallen by 800 points the previous week and these two bruising performances hurt private investors.

When the NSF enters the market, it is more likely to be competing with private investors for bargain stocks than to be propping up the local bourse. This is a tussle private investors cannot win because they do not have the same access to market information that the NSF has.

This is how the NSF acts under normal conditions. However, these are not normal conditions because there is the potential for insider trading resulting from the lack of separation between the Chinese Nationalist Party’s (KMT) assets and the state.

Consider this scenario: The president or government officials boost investor confidence, private investors either go on a buying frenzy or decide to hold on to the stocks and the KMT dumps stock from its own assets at the opportune moment. These stocks are then bought by private investors. However, panic hits, prices are slashed and investors sell to contain the damage. Then the KMT and the NSF step in and buy up the shares at bargain basement prices.

During the 2008 financial crisis, government officials continued to try to keep confidence up as the TAIEX continued to fall. One investor after another was cut down, while the NSF made a tidy profit of NT$33 billion (US$1.14 billion) and KMT asset dividends were NT$2.9 billion last year, all at the expense of private investors.

During the current stock market crisis, overseas investors have been dumping stocks of electronics companies, while investment trusts and dealers have been dumping shares of companies in the traditional manufacturing as well as construction industries — stocks which were popular prior to the crisis. Is the hand of the KMT’s assets fund behind this, too?

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