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Cabinet extends lower limit on stocks

“The government’s decision will provide a buffer against market fluctuations.”

— Kevin Chung, Jih Sun Securities analyst

The Cabinet yesterday extended the halved daily drop limit on the stock market for another week after several days of poor performance on the TAIEX.

Last Monday the Cabinet halved the drop limit from 7 percent to 3.5 percent for one week to guard against the impact of plummeting global stock markets.

Financial Supervisory Commission (FSC) Chairman Gordon Chen (陳樹) told a press conference yesterday evening that the measure had proved effective.

“But in view of the potential increases and drops on global stock markets in the coming week, the [Cabinet] decided that the measure will continue,” he said.

A ban on short selling stocks imposed earlier this month by the financial regulator was also extended last Monday to Dec. 31.

Vice Premier Paul Chiu (邱正雄) suggested on Tuesday, when the TAIEX rose by 271.12 points, that extending the drop limit would be unnecessary.

After the TAIEX dropped on Wednesday, Thursday and Friday, however, the Cabinet extended the measure.

On Friday, the weighted index fell 115.57 points to 4,960.40 — the lowest point in five years — as investors remained concerned about a global financial meltdown.

Chen said the FSC would decide on Friday whether to extend the measure again.

Asked whether the Cabinet was attempting to curb the potential impact on the stock market of prosecutors’ raids of several financial holdings, Chen responded that investors should remain calm.

On Friday, prosecutors searched the offices of firms including Chinatrust Financial Holding Ltd Co (中信金控) and China Development Financial Holding Corp (開發金控).

“The operations of our financial institutions remain normal. Our financial institutions also enjoy positive ratings internationally,” he said, urging investors not to lose their faith in the financial system.

Meanwhile, analysts said extending the drop limit of 3.5 percent for another week could cushion the stock market against volatile global equity markets.

The “stock market is vulnerable to changes in the US and European markets. The government’s decision will provide a buffer against market fluctuations,” said Kevin Chung (鐘國忠), who tracks the stock market for Jih Sun Securities Investment Consulting Co (日盛投顧).

The measure may slow capital outflows resulting from overseas fund managers who are selling stocks in Asia to obtain as much cash as they can to save their parent companies, Chung said.

“The government hopes to calm jittery investors by giving them more time to think about the ups and downs on global markets before triggering a panic sell-off right away,” Chung said.

The TAIEX closed 3.32 percent down last week, falling below 5,000, on Friday.

Andrew Teng (鄧安瀾), a senior analyst at Taiwan International Securities Corp (金鼎證券), had more faith in market mechanisms.

“The government’s intervention will steer stock prices away from a rebound [and they will] lag behind a recovery in global stock markets in the future,” he said.

Teng said that the stricter drop limit could actually increase selling pressure as investors are restricted from selling shares.
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