Taiwan investors: Fasten your
seatbelts By Scott
Ridley
TAIPEI - If the past few days are anything
to judge by, investors in Taiwan may have to hold on for
a bumpy ride while China and Taiwan try to rework the
common ground. Markets here have been on a roller
coaster ride since Taiwan's president Chen Shui-bian
gave his inauguration speech May 20 to mixed reviews.
Some called it measured and even conciliatory toward
China; Beijing denounced it as a move toward
independence.
Although Taiwan's financial
markets fell sharply last Thursday, when Chen failed to
say anything concrete that might improve relations with
China immediately, investors were back in the next day,
sending the main bourse up 2.6 percent. Local investment
trusts net bought NT$670 million (US$19.9 million) the
first time; local broker prop traders bought NT$4.17
billion. With domestic political uncertainty out of the
market for the short term, local pundits believe that
the index should range trade between 5,700 and 6,200
this month.
This week is already off to a
nauseous start. Monday trading fluctuated between
5,873.80 and 6,021.50 before closing at 6,021.50, with
Tuesday down slightly at 5,958.38. Thursday's closing
was 6,033.05.
Chen was praised by Washington for
his moderation; he did speak of a new constitution,
which Beijing opposes, but he didn't use hot-button
words like "sovereignty" that so upset Beijing. China
denounced his speech and said it would "completely
annihilate" any Taiwan moves toward independence.
Most steel stocks such as Tung Ho Steel rose
their daily 7 percent limit on Friday, with local
investors believing the sector to be oversold. However,
this week has seen the steel sector flatten out.
Construction stocks such as Hung Poo Real Estate have
risen over 8 percent over the last two days on the
belief that falling raw material prices for steel and
cement in China will reduce costs in the domestic
industry. (China is trying to apply the brakes to its
overheating economy, limiting investments in steel,
cement and real estate.) These steel and cement sectors
have also made gains because foreign holdings in these
stocks are low. Chen is also expected to focus on
boosting the domestic economy.
To be sure, the
government has been intervening in the market. It
announced that it had activated the government
stabilization fund, a fund formed by the government to
enter the market under extraordinary conditions on
Wednesday, May 19 - reassuring retail investors that not
is all lost. Retail investors are still hanging on to
the belief that government funds will save the market.
Taiwan is still a retail-dominated stock market, with
foreign investors owning about 21.2 percent, local
investment trusts 5 percent and the rest by retail
investors. Historically, the government has intervened
in the market in emergencies, such as the 2000
earthquake and 1996 missile crisis when China fired
missiles over the Taiwan Strait to warn unruly Taiwan on
the eve of its elections.
Given political
uncertainty, foreign investors have sold off billions in
Taiwan stocks over the past several days. This has
caused local retailers and investment trusts to be wary
of buying into the foreign investor sell off. In an
attempt to reverse this trend, Taiwan's Ministry of
Finance on May 23 reported it would ease regulations for
foreign investors. The measures include allowing
overseas institutions to remit money abroad from the
sale of borrowed shares and local banks to provide
same-day financing for trading. Foreign investors will,
in the future, also be permitted to remit abroad capital
gains from short sales. While welcomed by foreign
investors, this again indicates that the government is
reactive in the face of a crisis, rather than proactive.
These measures are expected to be implemented within the
next two months.
Twenty-four hours is a long
time in politics and Chen, despite the mainland's
fulminations, has won himself some international praise
and bought himself time, but the Taiex is in for tough
times in the remainder of 2004. Domestic tourism will
not likely see any increase in mainland Chinese visitors
for at least the next two years, a major disappointment
for the local economy and depressed travel industry.
Despite the government declaring "2004 Visit Taiwan
Year", using Naruwan ("hello" in Aboriginal),
post-election political unrest has kept tourists away.
Further, the local property industry and land
prices, despite having risen recently, also could be hit
by stagnant demand, since the stock market has corrected
recently. Both airlines and the local hotel industry
also are disappointed that there will be no immediate
chance of direct links, either for cargo or passenger
flights between Taiwan and major mainland cities. Also,
the option of indirect links, such as flying via Hong
Kong but not actually landing, doesn't seem a viable
option in the near future. Previously there had been a
proposal to have cargo flights fly via Hong Kong
airspace without landing - so-called direct links via
third territory or country without landing, thus saving
time, instead of flying directly to Shanghai from
Taiwan.
Chen, while trying to reach out to the
opposition political parties - both more pro-China than
his Democratic Progressive Party (DPP) - in a
bi-partisan manner on constitutional reform, is now
focused on the December legislative elections. The
opposition parties, the Kuomintang and People First
Party, in an apparent last desperate act, announced that
in principle they would pursue a political merger
strategy. Both parties are still bitter about their
narrow election loss to Chen and the DPP on March 20,
and more than likely they will be obstructive to the end
of the year in any legislative sessions. This ensures
more instability for the DPP government as it pursues
further reform.
In the short term, the market
will be focused on notebook computer makers and related
component companies. As well, handset component makers
are favored by some due to an expected seasonal up tick
in demand for handsets in the second half of 2004. At
present the banking sector is waiting for May results
for indications of future trends.
Scott
Ridley works for a financial institution in Taiwan.
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