Print

Mail

wiki links

One Year On: Economy - Steep fund losses may provide an important lesson

The tuition has so far cost roughly NT$150 billion.

The lesson: Better to let Adam Smith's invisible hand guide the market, not the government.

In the past year, the Ministry of Finance has racked up roughly NT$50 billion in paper losses attempting to support the market with its NT$500 billion National Stabilization Fund.

At the four government-related pension and labor insurance funds, the paper losses amount to roughly NT$100 billion.

Yet despite throwing huge sums of money at the market, the nation's main stock index is down 40 percent since President Chen Shui-bian (陳水扁) took office.

Most of the TAIEX's decline is the result of the slowdown in global demand for technology, which has hurt Taiwan's exports.

But what makes the government's intervention efforts a failure is not that the TAIEX is down. It's that the government even bothered trying to support the market in the first place. Many analysts say government interventions simply don't work and only prolong market downturns or corrections.

Mixed results

The case for government interventions is at best mixed.

The KMT government could claim some success in March last year, when pre-election jitters caused the TAIEX to tumble 7 percent in the week before the March 18 election. Investors dumped shares after it became apparent Chen would likely win the presidency, fearing his coming to power would translate into an angry response from China. But less than two weeks later, the index roared back 17 percent.

During that period of time there was some government buying -- but it isn't clear to what extent the intervention was responsible for the rebound in the TAIEX.

Did the government putting its weight behind the market help shore up sentiment? Or did investors merely realize that the US and Europe would continue buying Taiwan's high-tech goods, no matter who occupies the presidential office?

There's no clear answer.

Elsewhere in the world, Hong Kong has claimed success for its 1998 efforts to support stocks. The special administrative region spent roughly US$16 billion to arrest the decline in Hong Kong equities during the Asian financial crisis. Later, the shareholdings were turned into a mutual fund and sold back to investors.

But in the 1990s in Japan, no amount of market intervention could stem the exodus from Japanese stocks.

Power politics

What is surprising about the DPP's use of the National Stabilization Fund is that the government chose to intervene during at time when fundamental factors -- not politics -- contributed much to the market's undoing.

The NASDAQ closed out 2000 with a loss of roughly 40 percent. For the TAIEX, the loss was 43 percent.

That the Taiwan index followed its US counterpart lower is no accident: Many of the companies that comprise the NASDAQ index outsource to those that make up the TAIEX. A slowdown in earnings growth at US companies means a slowdown for Taiwan as well.

But a large part of the government's intervention efforts came at a time when the DPP and opposition legislators were locked in a fierce battle over the Fourth Nuclear Power Plant (核四).

The finance ministry reasoned that squabbling over the plant was creating instability in the market, and therefore intervention was warranted.

Critics howled. The stabilization fund was formed to bolster shares when non-fundamental factors -- such as saber-rattling from China or a natural disaster such as the 921 earthquake -- scare investors into panic-selling.

Opponents charged that the government was buying shares to shore up support for its battered public image -- not the market.

What now?

There are a few signs the government is contemplating getting out of the business of buying shares. In April, there were reports the stabilization fund would be turned over to private equity managers.

The Ministry of Transportation and Communications has also said it will turn over the Postal Savings Fund to private equity managers.

One problem still left to be worked out is how to sell the government's massive shareholdings without further depressing the market.

This was the same problem that Hong Kong faced after its 1998 intervention. So naturally, some have proposed a Hong Kong-style solution of creating a mutual fund, selling subscriptions to local investors.

But such a solution would have to wait for a market upturn, as investors are in no mood to buy equities now. In addition, any mutual fund offering would wind up competing with other government share sales for capital, such as the ongoing sale of Chunghwa Telecom (中華電信).

Another proposal is to package the shares as American depository receipts (ADRs) and sell them in New York. This isn't a bad idea, as it would minimize the impact on domestic investors and increase opportunities for foreign investors seeking access to the Taiwan market.

Taiwan's restrictions on foreign investors often limit global fund managers to the ADRs of Taiwan companies. If they want exposure to Taiwan, the choice is limited to a handful of companies such as Taiwan Semiconductor Manufacturing Co (台積電) and United Microelectronics Corp (聯電).

But an ADR based loosely on the TAIEX would give global fund managers broader exposure to Taiwan shares. The ADRs could serve as a proxy for the Taiwan market, sort of like the way a Spider acts as a proxy for investors who want to buy the S&P 500 index in the US.

To boot, the ADRs for TSMC and UMC trade at a premium to their local shares. Historically, TSMC has traded at roughly a 50 percent premium to the underlying shares.

So were the government to sell its holdings in the US, it could expect to unload them at a price higher than what the shares would fetch on the local market.

This would perhaps give the government a chance to recover some of its paper losses, or even sell the shares at a profit.
This story has been viewed 2103 times.