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

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.