The TAIEX didn't let the public down at the start of the new millennium, breaking the crucial 10,000 mark by February. The local bourse has witnessed phenomenal growth so far this year on the back of a strong showing in foreign stock markets, buoyant optimism about future economic development, and a series of policies designed to boost the financial sector as we approach the the upcoming presidential elections.
But even though government officials and stock analysts have expressed confidence in this year's economic growth and insist the bullish market will continue, there still is some gloom lurking off the horizon.
Taiwan is seriously awash in short-term funds and must shoulder serious risk because of the nature of its major industries. We could mention that cross-strait tensions that could flare up at any minute, and then there is always the possibility of another global financial meltdown.
The oversupply of funds in Taiwan can be seen by the fact that the overnight rate recently dipped back to around 4.6 percent, a level that has only been seen before in 1987 and 1989, the two speculative periods in Taiwan's recent history.
The level on deposit of Central Bank of China (CBC,
If the CBC continues to issue NCDs to take currency out of circulation, it is estimated that the amount held in NCDs will quickly climb to NT$1 trillion.
One trillion is the figure that Lii Sheng-yann
Some commentators have said that the present loose money supply may be of some benefit by the end of the year when a great demand for funds for private investment and public projects is expected.
The Directorate General of Budgeting, Accounting and Statistics (DGBAS,
Moreover, if this NT$1 trillion finds its way back into the financial markets it will have a major effect on the market as a result of the monetary multiplier effect.
This shows that ultimately, the equivalent-amount money supply -- instead of a money base -- should be the basis for meeting demand.
The total market capitalization of the TAIEX reached NT$14.32 trillion after the market skyrocketed on Feb. 9, 21.6 percent higher than last year's level.
Dealers now say that daily trading volume levels of NT$320 billion are not excessive and assert that an average trading volume of NT$200 billion is reasonable.
The M2 money supply has only grown at a yearly rate of 7-8 percent, and one has to wonder if the CBC wishes to see so much money flowing into the stock market.
Further, the production and export of high-tech electronic, communication and information technology products may have quickly rebounded since last year's earthquake, but the direction of the industry and technological breakthroughs are still controlled by the US and Japan.
Meanwhile, Taiwan must raise capital, construct costly plants, and then produce on an OEM basis for firms that have a strategic alliance with it.
While the public is ecstatic about Taiwan's continued high manufacturing competitiveness in the international market, they seem to have forgotten that companies in Taiwan must bear the risk of building production plants that cost up to NT$100 billion.
Product cycles are becoming more and more rapid, and if a company fails to get a product out at the right time, it won't be the innovator of the technology who suffers, but rather the producer holding the massive investments that will go bankrupt.
It is doubtful that most investors have considered that the high returns on stock in these industries are a far cry from the risks associated with them.
The present bull markets of Taiwan and China do not signify a reduction in cross-strait tensions.
Then there is the fact that Russia recently delivered an advanced Sovremenny-class destroyer to China, and weapons sales to China and Taiwan have increased tensions between China, Taiwan and the US.
The war of words surrounding President Lee's Teng-hui's (
The Asian financial crisis of 1997 signalled that the political control of natural resources has come to an end. Developed countries' new strategy for exploiting the resources of developing nations is to depend on finance, which is just as effective a method of control.
While developed countries sing the praises of financial liberalization, speculative money flows from those countries have again and again come into developing markets with devastating effects.
Central Bank Governor Perng Fai-nan
Analysts in Taiwan expect between US$20-40 billion in foreign investment to flow into Taiwan within the year, as a result of the raising of the MSCI.
Champaign corks may be popping as a result of the TAIEX breaking the psychological 10,000 barrier, but as for hopes that the bourse will continue to rise to 12,000 or 15,000, we should remember the experience of other countries subject to large and rapid influxes of foreign capital.
Mahavira is a deputy manager at Truswell Securities Investment Trust Co.
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