The Financial Supervisory Commission’s decision to advance the launch of its “fourth arrow” to attract more retail investors and shore up the stock market suggests it has an eye on the rapidly shrinking daily turnover seen in recent trading sessions.
Last week, the commission announced that a set of measures regarding more relaxed regulations on margin trade and short sales would take effect on Monday next week, a week ahead of the original start date of Nov. 10.
The measures are aimed at increasing daily market turnover by between 3 and 5 percent in six months, so moving up their implementation indicates that the commission attempting to pre-empt a liquidity crisis in the bourse amid rapidly declining trading volume and rising market volatility.
Statistics compiled by the Taiwan Stock Exchange Corp showed that the average daily market turnover was NT$71.02 billion (US$2.34 billion) on the main bourse last week, the lowest weekly level recorded in the past 10 months. That compares unfavorable with a daily average of NT$118 billion seen in the period from July to this month, and lags far behind the daily average of NT$127 billion reported in the first half of the year.
Like major stock markets elsewhere, Taiwanese shares are undergoing a correction due to investor concern about the timing of the US Federal Reserve’s interest rate hike, the pace of the global recovery and the Ebola outbreak reaching the West. On the domestic front, it is also being affected by issues such as the tainted cooking oil scandals and the Nov. 29 nine-in-one local elections.
In addition to these factors, many investors have also stayed on the sidelines to boycott the government’s impending revised capital gains tax on stock investments, especially a new levy on investors who trade stocks valued at more than NT$1 billion within one year, the Taiwan Securities Association said at a news conference on Thursday.
It remains to be seen if the government’s market-boosting efforts will be in vain, given the expected selling pressure posed by the macroeconomic uncertainties, but in any case, the effect of relaxing rules on margin trade and short sales could be limited because ordinary retail investors rarely use their entire margin finance quotas.
On the other hand, fear is effective in dragging down trading volume and the proposed tax is certainly a source of particular concern for the big players. The brokers’ association has warned that the daily average turnover could drop below NT$50 billion after the revised capital gains tax takes effect next year.
The Ministry of Finance does not think that the local bourse’s downturn has been caused by the new tax rule, as it has not been implemented yet. The ministry believes the levy is fair and is needed to help plug holes in the government’s budget book. Nonetheless, the idea has triggered alarm — not least from the brokers’ association — recalling memories of what happened in the first half of last year after the government approved the tax in late 2012.
This is not to suggest that the government should scrap the revised tax, as the brokers’ association wants, but it must tackle the continued shrinking of stock trading volume that has plagued the market over the past decade. This evokes the critical question of why the nation’s stock market has become less competitive compared with its regional peers over the past 10 years. Does the cause of this weakness lie in some fault in the fundamentals of the national economy? Or is it the relatively higher tax burden imposed on stock investors?
Perhaps the results of the upcoming local elections will give the finance ministry a tip on how to solve this problem.
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