In order to combat the Taiwan stock market’s infamous volatility, oYcials in Taipei have come up with the idea of a National Stabilization Fund (NSF), whose job it is to intervene selectively and dampen down sharp stock market falls.
The intervention of government funds in the Taiwan equity market is not new, but what makes the NSF noteworthy is its size. The amount of capital set aside for the fund currently stands at NT$500 billion ($16 billion).
The NSF made its Wrst foray into the market during the recent presidential elections. According to Susan Chang, director general of the Department of National Treasury, the fund is only authorized to intervene in the event of non-economic shocks to the exchange, such as the literal shock of an earthquake or a military confrontation with mainland China. Both are ever present dangers.
The aftermath of Taiwan’s recent presidential election, the “China eVect”, had a heavy impact on the exchange at the end of March. That’s partly because the election was won by a candidate, Chen Shui-bian, who refuses to bow to Beijing’s demands that Taiwan accept what is known as the one-China principle. Since the elections, periodic rumbles from China have caused substantial declines in the Taiex and in turn triggered NSF share purchases. The fund has now intervened numerous times to prop up the stock market, says Chang and in three days of buying alone, the fund bought NT$52 billion of stock.
Equity sales teams in Taipei may welcome the comfort effect of the NSF, but the diversion of such a large amount of money from the economy does raise other concerns, particularly about Taiwan’s weak banking sector.
Of the NSF’s NT$500 billion total, NT$300 billion has come from pension funds, national postal savings funds and insurance funds for government employees, says Chang.
For the remaining NT$200 billion the Taiwanese government went to the island’s banking sector to arrange a two-year syndicated loan. International Commercial Bank of China led the syndication and was joined by 13 other state and private-sector participant banks.
The deal followed close on the heels of another substantial, this time, multi-tranche syndicated loan from the local banking sector – a NT$323.3 billion transaction to help finance the construction of Taiwan’s new high-speed rail system.
These two giant loans come at a time when the average overdue loan ratio in the Taiwanese baking system is rising (it is now over 5%) despite the fact that the economy is buoyant. Local banks were already heavily exposed to the local stock market before the NSF loan. The NFS is generally regarded as a plus for Taiwan’s stock market, and what is good for the stock market should also be good for the banking market.
