Introduction
The performance of the stock market affects the national economy directly and influences key decisions by the government and corporations. The stock market is thus a fundamental economic pointer to financial analysts and investors, both local and international. Conventionally, the stock market is supposed to operate under the economic model of demand and supply, in a perfect economy.
However, the stock market experiences shocks and strains that affect its performance. It is, therefore, prudent and imperative for the government to come in and stabilize the markets. The objective of government interventions is to optimize allocation of resources and remove bottlenecks. This paper focuses on the government intervention to the Taiwan stock market.
Taiwan Stock Market
Taiwan is an island in East Asia that is dependent on international trade. Taiwan’s financial market is comprised of stock market, forex market, and bond market. Taiwan Stock Exchange is the national stock exchange and is found in Taipei. Taiwan’s stock exchange is also known as Taiwan Stock Exchange Corporation, and was established in 1961 and commenced operations in 1962.
Since its inception, Taiwan stock exchange renders a variety of information concerning the market trends. The Taiwan stock exchange offers a wide range of products securities, market surveillance, settlements, trading of securities and investment services. The Taiwan market is heavily influenced by the Taiwan politics. This has exposed them to a myriad of systemic non-economical stresses (Dent 114).
For instance, in 1996, the first democratic elections were held in Taiwan. Unfortunately, the elections stimulated a plunge of the stock market to unprecedented lows. The government intervened by establishing a Stock Stabilization Fund to cushion against the instability of the stock market. Moreover, in the year 2000, Taiwan experienced the first political transition to the opposition (Schneider and Barbieri 135).
This political development triggered uncertainty causing the stock market to destabilize. The government intervened by using an enhanced stock stabilization fund. The government further utilized the National Financial Stabilization Fund more than twice, in the year 2000, to mitigate imminent market collapse, and investor confidence.
International financial markets strained excessively in 2011, partly due to the debt crisis in a majority of European countries. Europe and the United States of America pose integral influence in international trade. The slow and frustrating economic outlook in the US and Europe has hampered many investors worldwide (Kim 70). This trend climaxed in August when the stock market declined immensely.
According to Taiwan stock Market, Taiwan Exchange (TAIEX) fell by about 219 points in September 2011. There was wide spread protests from stakeholders urging the government to intervene and stabilize Taiwan Stock Exchange market. Government intervention was meant to support share prices. The government of Taiwan intervened in the equity market and ordered listed companies to buy equity shares.
This tendency for governments to intervene in the stock market has precedence in various countries. The government interventions include formulation of financial regulations and banking policies. These regulations range from interest rates to trade insecurities. However, in Taiwan, the National stock stabilization fund is used to trade securities openly in order to provide stability in the stock market.
The state interventions in Taiwan stock market have failed to stabilize the market. For instance, TAIEX fell lowest in the month of August 2011. The reasons for the drop in TAIEX are the financial, global crisis, the natural calamities of Japan and the European debt crisis. The dependence on international trade coupled with the international challenges propelled a sharp decline in the markets.
The slump in TAIEX caused enormous loss to more than two million Taiwan’s stockholders. The volatility of the Taiwan stock market triggered foreign investors to sell about all the Taiwan shares that they had bought the previous year. This subsequently dipped the demand for Taiwan shares thus low TAIEX. The government’s intervention underpins the credibility of the market to stabilize itself.
Financial analysts argue that changes in share prices underline the response by investors to the market conditions. An overrated response by market participants causes more instability. However, proper analysis of the market conditions and implementation of the required financial instruments by market participants would stabilize the market. Hence, financial analysts argue that government intervention complicates the market trend and is not always a successful solution.
Their argument is proven by the trend observed in the Taiwan Stock Market. Government interventions only provide avenues for manipulation to score special interests. For instance, investors may collude, with the government, to stimulate an imaginary crisis for the government to intervene. Therefore, the government should create a transparent and fair environment for competitive market operations.
The National Stabilization Fund
The Taiwan government gave a firm commitment to activate the use of the National Stabilization Fund to support the stock market. This government intervention is meant to boost investor confidence (Drysdale 143). Taiwan stock market is highly influenced by Taiwan politics hence the Taiwan authority has to dispel any fears that the investors might have, following the presidential and legislative elections.
The government formed the fund’s management committee to oversee the intervention measures to oversee the stability of the stock market. The steering committee was also mandated to lower uncertainty amongst investors with regard to the debt crisis in Europe and the US. The government authorized the utilization of the fund for the first time in December 2011 since September 2008 (Su 12).
The Taiwan stock exchange posted an increase of 518.9 points for implementing the stabilization fund. The National stabilization Fund had a kitty of NT$500 billion. The steering committee continued the intervention by buying large stocks. The government bought stocks from giant firms like Smartphone maker (HTC Corp), Formosa Plastics Corp, and Taiwan Semiconductor manufacturing company.
The continued interventions were informed by the decline in market turnover. For instance, the daily turnover fell to a low of NT$71.3 billion (Schuman 78). This statistic made the stabilization funds committee utilize about NT$15.1 billion to make the stock market stable (Schuman 80). According to the fund’s steering committee, the political elections present formidable challenges to the stabilization of the stock market (Lee 75).
The committee was aware that large stocks were resilient to the market shocks; however, the Taiwan market was largely susceptible to non-economic factors. Analysts agree that the intervention by the Stabilization fund was successful to some extent in stabilizing the stock market.
Consequences of Government Intervention
The government intervention stimulated unscrupulous behavior by investors and stock market participants. There are reported instances of managers rechanneling the company’s finances in order to raise stock prices. This trend is prevalent mainly amongst principal shareholders. They mortgage high value of stocks with the banks, hence putting the financial market at a risk, in case the stocks are sold at low prices.
The Taiwan government should create independence of the stock market, and the financial market in order to eliminate this bottleneck. A number of investors increase the financial risk of clients by margin trading using the clients stocks. This scenario is catastrophic in case stock market prices fall. The shareholders would incur enormous losses that catapult social problems in the society.
The Taiwan authority should legislate against this tendency in order to cushion the stock market and finance institutions. Analysts have argued against some government policies. For instance, the variance on margin percentages during short selling and buying accumulates a catastrophic effect on stocks over time (Tung 217). Financial experts argue that many government interventions in the stock market keep off foreign investors.
The Taiwan government should reduce its intervention and create fair conditions for perfect stock market competition (Shean-bii 8). In addition, the new government should cushions the stock market from political developments and non-economic factors (Ma 117). The function of the government should move from intervening to formulating prudent regulations and policies to govern the stock market.
Conclusion
Taiwan Stock Market is highly dependent on international trade and developments. For instance, the debt crisis in Europe and the United States of America enormously affected the stock market. Moreover, Taiwan Stock Market is susceptible to political developments in Taiwan. A case in point, during the run-up to general elections, the stock market turnover declined considerably. Politics create apprehension and uncertainty into investors hence the impact on stock markets.
The government of Taiwan established a Stock Market Stabilization fund to intervene in restoring stability of stock markets. The fund has been used to some success; however, Taiwan’s stock market experiences low stock turnover. The government interventions are impeding foreign investments in the stock market. Therefore, Taiwan should minimize its interventions and attract foreign investors.
Works Cited
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Drysdale, Peter. Reform and Recovery in East Asia: The Role of the State and Economic Enterprise. UK: Taylor & Francis, 2000. Print.
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Lee, Anru. In the Name of Harmony and Prosperity: Labor and Gender Politics in Taiwan’s Economic Restructuring. Albany: SUNY Press, 2004. Print.
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Su, Army. State Support for TAIEX to Continue. Taipei Times, 2012. Web.
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