July 08,2008

Taiwan Moves to Revive Its Stock Market, Mainland China Pays Lip Services

By Ma Wenluo

In the middle of last month, China’s A-share market dropped below the 3000 threshold, at which point many investors expected the government to intervene to prop the whole thing up. The government had earlier stepped in with reforms to steady the market but, as those measures proved ineffective, it has so far resisted the temptation to interfere this time. As the market has continued to slump below 2800, it is instructive to glance across the Taiwan Straits and note the different approaches adopted by Beijing and Taipei about how to rescue the market, or whether to rescue the market at all.

Whether to shore up a slumping stock market is hardly discussed in Taiwan. It is considered a responsibility of the government. In 2000, great change came to Taiwan with the fall of the KMT administration, and the stock market fell from 13,000 points to 6,000 points. The new DPP government set up a fund of NTD500 billion to stabilize it. Recently, in the month following the 5/20 election, Taiwan's Weighted Index fell from 9,300 points to 7,400 points. To avoid a recurrence of the stock market crash of eight years ago, the Kuomintang government, led by Ma Ying-jeou, called in the leaders of the financial sector to discuss strategies and adopted policies to steady the market.

The cumulative decline of the mainland stock markets over the past eight months has reached nearly 60 percent, far exceeding the 20% fall of Taiwan's stock market and 23% slide of the Dow Jones Index, and exceeds even the 54% plummet of the Vietnamese stock market, seen as a crash by the international community.

To save or not to save the market arouses different views in the mainland. Free market economists think that China's stock market in the past was a "policy market," and that government intervention turned the stock market into a casino. They point out that relying on government intervention to resolve the crisis is a recipe for moral hazard and is not good for the market’s healthy development.

People advocating market rescue invoke the example of the real estate market. They point out that the primary land market is a government monopoly while the secondary market is open, which results in homebuyers paying for the profiteering of the real estate market, and the overall financial system is "kidnapped" by the real estate industry. The government’s strict control of the primary equities market has seen many IPO shares last year fall below the issue price and even net assets. And the introduction into the market of vast stakes of originally non-tradable shares has aggravated stock price declines. All of these point right back to the initial planning by the government, and secondary market investors should not have to bear their brunt. The chaotic market now demands the not-so-invisible administrative hand to regulate the funds in the secondary market.

Ten years ago, any official editorial in the media was regarded as government intention by investors. That system has fallen into chaos. On July 1 Xinhua News Agency published an article written by a reporter, pointing out that in the current optimistic view of the economy, the stock market would have a stable and healthy development. However, official comments from the same agency said just the opposite, pointing out that the economic situation for the second half year of 2008 looked grim. Moreover, regulatory officials issue statements but take few practical measures. Two months ago, the authoritative People's Daily published three major articles by regulators, which did nothing to slow the market slump.

Diversification of economic policy sources leads the government into a dilemma. Beijing’s stated primary economic goal this year is to restore the CPI to 4.8% or below. To achieve this goal, the state has no choice sometimes but to temporarily sacrifice the interests of listed companies. The stock of China National Petroleum Corporation is the primo heavyweight of the A-shares. On its first day of trading, it took up as much as 23 percent of the whole market value of the Shanghai market. Then its share price fell below its issue price and pulled down most A-shares with it. The reason behind its fall is that the government, fearing runaway inflation, limits the price of refined oil, resulting in losses for China National Petroleum Corporation.

During the fourth Sino-US strategic economic dialogue in the middle of June, and more recently at the Bank for International Settlements in Basel, China’s central bank governor Zhou Xiaochuan said the increase of oil and electricity prices aggravates inflationary pressures and that the central bank may have to adopt a more hard-line measures to deal it, not good news to investor ears.

CPI on the mainland has pushed up over 8% this year, while the CPI of Taiwan has not reached 4%. Compared to the lip service paid by the mainland government, the Taiwan authorities have adopted specific measures to rescue the stock market. On June 28, Taiwan's Executive Yuan, the Taiwan cabinet, announced five measures: ask the four big government funds to invest in stocks with low return on investment and stable dividend; encourage the 8 trillion yuan of insurance funds to flow into the stock market with intention to hold long-term; expand the limits of life insurance companies buying ETF; encourage listed companies to buy back shares; and ask directors and supervisors of listed companies to come up to required share holdings, which has yet to reach the mandatory amount.

One important reason for the market decline in Taiwan is the selling-off by overseas funds, which have held as much as 30 percent of the whole value of the market. In view of this, Taiwan's vice-president and head of the financial sector invited foreign corporations to "drink coffee" and urged them to keep their funds in Taiwan.

Attracting the return of overseas Taiwanese capital is also important. A sluggish mainland A-share market causes lots of institutional investor funds to sit idle. The Taiwan authorities also allow mainland fund companies to invest in its stock market and work to make the market attractive to them by its stability. Ten years ago, after the financial crisis in Southeast Asia, in order to prevent a major stock market decline, Taiwan established a stabilization fund. That NTD500 billion became the last support to steady the market.

The current rescue measures in Taiwan have not brought about all the desired effects, due not a little to the bumpy eight-year rule of the Democratic Progressive Party, coupled with the adverse effects of the world economy. However, Taiwan has at least set forth measures to resuscitate the market. Currently, mainland authorities have not encouraged institutional investors and the social security funds to stay with the market. Although the China Securities Regulatory Commission has also used "drinking coffee," i.e. telephone notification and forums, to dissuade investment funds approved by government from selling stocks, it has not announced timely relevant news to the public through media as has Taiwan, to clearly express the determination of the government, nor has it established a stabilization fund to appease investors. Although the average p/e of the Shanghai and Shenzhen 300 Index is 15 times, and A-shares are cheaper than American Stocks, punters are still reluctant, for they have little faith in the market. Except for April’s lowering of the stamp duty and the strengthening of non-tradable shares regulation, investors have seen no practical actions to breathe life into the market. They are waiting for the introduction of new policy. How long will they wait?



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