Taiwan's domestic bond market is well known for its contradictory tendencies. Although the overall market is periodically the second largest in Asia behind Japan's (from time to time edging South Korea's market into third place) the volume of trading done is often pitifully small. "When interest rates are falling there is tremendous liquidity," says one local dealer. "When rates begin to rise, securities houses stop trading in the Taiwan market and liquidity shrinks to nearly zero."
Trading houses and underwriters are lobbying the government to make several regulatory changes to remove those hurdles that have stymied liquidity. The requested changes include: a better physical delivery system, the development of an interest rate futures market, permission to perform bond forward trading and short selling of bonds, and most important of all, the abolishment of the 0.1% bond transaction tax.
The authorities appear to be listening. A proposal for a reduction or abolition of the transaction tax is already in the legislative process, says Nicholas Teo, vice-president at Grand Cathay Securities, the largest local bond underwriter.
Several other positive regulatory developments have been implemented in recent months, or are in the works. Chang says an electronic network trading system is due to be up and running early in 2000.