A recent news commentary said: “The fall in trading volume on Taiwan’s stock exchange has aroused particular concern from the Cabinet, which sees it as a warning that action needs to be taken ... and it will immediately organize an interministerial meeting about how to rescue the stock market.”
Another one stated: “We should acknowledge the speedy action of the Chinese Nationalist Party [KMT] [legislative] caucus in integrating various proposals for a capital gains tax on securities investments, thus minimizing market uncertainty.”
These examples show how closely politics and the stock market are tied together. They are a reflection of a remarkable cultural trait that has long been prevalent in Taiwan — namely the idea that the government should be held responsible for the state of the stock market and that it should show special concern about how the stock market reacts whenever it proposes a new financial policy. However, this cultural trait has not only caused a continual waste of political resources, it has also hindered the sound development of the stock market and has had a profound effect on the nation’s long-term competitiveness.
The stock market is affected by many factors. Apart from economic, financial and monetary policies, other factors include the economic cycle, the growth and decline of industries, interaction with global financial markets and the regional political and economic climate. One could say that the stock market is like a window display that gives an overall reflection of all these factors, so trying to control the stock market by means of any single factor is bound to be a waste of effort.
Financial policies are not formulated just to create a conducive environment for industry and investment, but, more importantly, to determine the most rational distribution of resources. Effective policies must take the nation’s long-term development goals as their starting point and should not be unduly influenced by short-term rises and falls in stock prices. As long as policies are oriented in such a way as to promote economic growth and social justice, they will naturally promote a healthy development of the stock market — and a healthy stock market characterized by rationality and fairness will in turn help create greater economic prosperity.
However, Taiwanese politicians seem fixated on the stock market. When they are interviewed, they are always ready to quote data such as stock index fluctuations and trading volume. When the stock market is on the rise, they can hardly contain their joy, as if it were a confirmation of their policy achievements. On the other hand, when the market falls, they look tense and anxious and are keen to state the government’s determination to save the market.
If the government is so focused on the stock market, it is bound to waste a lot of time and effort on seeking quick results that fix the symptoms, but are not effective in the long term. As a result, resources that the government could use for formulating and implementing long-term policies are diverted to serve short-term goals instead.
Another consequence of this excessively close relations between politics and the stock market is interference in the stock market for political ends. Government officials often comment arbitrarily in the media on stock values and fluctuations. What is even more improper is when there is a big fall in the stock market and officials either openly state or drop hints that they will use public resources to salvage the market. Their purpose is to boost stock market confidence, but they do not think about the possibility that if investors — especially relatively disadvantaged individual investors — buy shares based on what officials say, it will cause even greater harm in the long run. This practice fuels rumors about whether state funds are going to enter the market to prop up the index and impedes the normal functioning of the equity market.