In the NewsTime for the government to exit Taiwan’s stock market (CNA)
International financial markets have been in a state of shock for much of 2011, with contributing factors including the sovereign debt crises of several European nations and downgrading in August of the credit worthiness of the U.S. The lack of a genuine economic recovery in Europe and the U.S. has further added to the sense of gloom felt by many investors. Things finally came to a head in August, when stock markets worldwide plunged spectacularly on several occasions. Taiwan’s stock market, the TAIEX, has been no exception, falling 219 points Sept. 13 following back-to-back crashes at major equities markets days earlier. As local stock prices plummeted, a chorus of voices arose demanding that the government lend its support to the TAIEX. In Taiwan, this support means that the government uses the various investment funds under its control to prop up share prices. While the government claimed that it abided by the investment choices the funds’ managers made, it did not deny intervention in the equity market. Recently the government has also urged listed companies to buy back their own shares, hoping that the practice can help keep stock prices high. It is not uncommon for countries to influence stock markets with financial policies or banking regulations, such as interest rate adjustments by central banks and changes in rules by securities authorities governing short sales of stock. The key point is to refrain from directly influencing market prices. Taiwan’s situation—where state-managed funds trade securities in the open market in an attempt to reverse market sentiment—is almost unheard of the world over. When the government uses moral suasion to encourage stock buybacks, and thereby infringes on the rights of a company’s board of directors, that is simply incredible. Now that the precedent of intervention has been set, whenever the market feels a little unsteady on its feet everyone clamors for the government to get to work, even when share prices fell in response to international events such as the March earthquake in Japan or the civil war in Libya. When government intervention in the TAIEX becomes a habit, the absurd has become the norm. The TAIEX fell more sharply than either the NYSE or NASDAQ in August. In other words, state intervention has been unable to turn things around; its efforts have been a complete waste of time, an exercise in futility. Taiwan’s economy is highly dependent on the international situation. If there is widespread fear among international investors that a second global recession is on its way, it is only natural that the TAIEX would fall. The reason that the government busied itself with market intervention lies in a lack of trust in the market. Changes in share prices and turnover reflect investors’ responses to market information, and overreaction occurs when such information is not fully digested. When the information is fully absorbed by market participants, the market will automatically stabilize itself without government meddling. Both theory and practice have shown that arbitrary interventions cannot alter market outcomes; they only create opportunities for manipulation and arbitrage. On the other hand, if investors know that they can always count on government interference when things reach a certain point, they will be able to buy and sell stocks accordingly. They can even deliberately create downward pressure to sell, thereby forcing the government to act and get them off the hook. After so many years, it is time to put state intervention to rest. The government’s role is to ensure fair and transparent transactions in the market. As to day-to-day operations, it should allow the market to look after itself. A market that needs coddling is still in its infancy. It is certainly not one that international investors would recognize. (HZW) (This commentary originally appeared in the Economic Daily News Sept. 14.) Write to Taiwan Today at ttonline@mail.gio.gov.tw |
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