Mon, Apr 16, 2018 - Page 6 News List

EDITORIAL: Investment must follow day trading

The government has thrown its weight behind plans to expand Taiwan’s capital markets and make them more competitive than those of regional peers by attracting more equity investors and attracting a variety of companies to launch initial public offerings (IPOs).

The Legislative Yuan on Friday passed an amendment to the Securities Transaction Tax Act (證券交易稅條例), extending the tax cut on day-trading transactions to the end of 2021. That came after the Taiwan Stock Exchange (TWSE) and the over-the-counter Taipei Exchange (TPEX) started implementing new listing requirements this month, allowing firms with sizable net value, large revenue and sound cash flows to seek an IPO on the local bourses, regardless of whether their businesses are profitable.

The tax cut on day trading transactions — from 0.003 percent to 0.0015 percent — took effect on April 28 last year and was to end on Friday next week after a one-year trial, as at that time there were still concerns, primarily from the Ministry of Finance, about whether the local stock market could generate the NT$10 billion (US$341.27 million) more in average daily turnover needed to cover the estimated tax revenue loss of NT$3.75 billion per year from the tax cut.

However, the cut appears to have boosted day-trading volumes and stimulated general trading activity on the local bourses.

Financial Supervisory Commission data show that average daily turnover from day trading grew from 9.6 percent at the end of 2016 to 21.83 percent as of Feb. 28 on the TWSE, and from 14.6 percent to 31.03 percent on the TPEX. Moreover, average daily turnover on the two exchanges expanded from NT$98.75 billion in 2016 to NT$151.71 billion at the end of February, a more than 53 percent increase and sufficient to offset potential losses in tax revenue.

The latest data show that revenue from securities transaction taxes grew 32 percent from a year earlier to NT$24.9 billion in the first quarter of this year.

Calls from Democratic Progressive Party and opposition lawmakers alike to extend the tax cut increased at the end of last year, with some suggesting an even longer extension, and months of negotiations between lawmakers and government agencies resulted in the law being amended to stipulate a tax cut extension of three years and eight months, expiring on Dec. 31, 2021.

Moreover, to maintain market momentum, from Friday next week the tax cut is to be offered not only to investors, but also to proprietary trading companies.

Official statistics show that the tax cut helped boost transactions in the local stock market, which in turn increased revenue from securities transaction taxes. The government’s strategy is not visionary, but pragmatic, because its main goal is to increase turnover as quickly as possible.

However, there is the question of whether the tax cut rewards speculation while discouraging long-term investment. If the volume of day trading were to increase to 40 percent, as has happened in Japan and the US, would it exacerbate volatility, rather than stabilizing the local market?

As a next step, the government should consider the establishment of a protection mechanism against day traders, before it is too late. It should also continue to reform securities-related laws to develop a sound environment for equity investment in Taiwan.

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