Good-bye capital gains tax, we hardly knew ya

One of the many things this mess with the Phils has enabled the government to divert public attention from the drive to eliminate the capital gains tax. As a tax on the wealthy which kicked in when the stock market crossed 8,500, it was odious to the KMT, the island's party of the 1%. In the latest "economic stimulus" package of the government, it will be killed....

One of the measures involved the legislature passing an amendment to the Income Tax Act (所得稅法) before the current session ends on Friday to drop the 8,500-point threshold that automatically triggers the capital gains tax for individual investors, Jiang said.

The Chinese Nationalist Party (KMT) has proposed removing the requirement that the TAIEX surpass 8,500 points for the tax to be imposed and replace it with a tax on investors who sell NT$1 billion (US$33.3 million) worth of shares during one calendar year.

The premier said that abolishing the threshold would turn the economy around because it would be like “lifting the cover off a pot” to let the “suffocated” economy breathe.

Alas, removing the capital gains tax will simply result in more capital being hoarded and then shipped out of the country instead of being reinvested here and driving economic growth in Taiwan. It will only make the rich richer, and Taiwan being so expensive, the poor cannot even console themselves with babies.

UDN rightly complained:

Despite the many steps taken, however, nothing has seemed to work. The latest package focuses on expanding consumer spending, boosting domestic investment, encouraging innovation and new business start-ups, and revising the capital gains tax on stock sales. The content is not at all inspiring because it did not go beyond the existing policy framework.

Moreover, the government is planning to invest a mere NT$3.24 billion over five years in the new package. How can we expect it to rescue Taiwan's weak economy?

Figure it out. In US dollars, $3.24 billion is a little over US$100 million, or $20 million annually for the "stimulus". Peanuts.

According to the TT article, the DGBAS lowered its estimate of growth for the year to 2.4%. Recall that industrial output fell for the third straight month in April, as Bloomberg noted in its roundup of economic indicators.
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Daily Links:

• Growing threat to Taiwan from Russian missiles in Chinese hands.
• Taiwan banks moving into SE Asia
• Taiwan government proposes move to block major piracy sites, stirs protests.
• Michal Thim: Taiwan's domestic politics driving dispute with Phils
• Drew attempts Wuling. Gorgeous pics, and a paean to our beloved friend, the awesome Dom Alonge.
• In case you forgot, the anti-media monopoly movement is still going strong.

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[Taiwan] Don't miss the comments below! And check out my blog and its sidebars for events, links to previous posts and picture posts, and scores of links to other Taiwan blogs and forums!

KMT Wants Stock Transaction Tax "postponed"

There is nothing so permanent as a temporary emergency -- Robert A. Heinlein

The KMT moves to protect one of its most important constituencies, the nation's wealthy non-taxpayers, by mooting a delay in the implementation of the stock transaction tax.

Several legislators called on the government to postpone levying a capital gains tax on stock transactions because the stock market continues to remain sluggish. KMT legislator Sun Ta-chien (孫大千) proposed raising the stock transaction tax from the current 0.3% to 0.35% and postponing the effective date of the recently passed capital gains tax on stock transactions. Moreover, as the capital gains tax on stock transactions would take effect on January 1, 2013, a high- ranking KMT official stated that the Legislative Yuan and the Cabinet could jointly propose a "sunrise clause" to postpone its implementation.

As I've noted a few times since the election (and before), I suspect a key hidden factor in the election was the support of the class of non-taxpaying holders of capital wealth for Ma. Now they are getting their money's worth out of the KMT.

Another factor here is the role of the stock market as an indicator of the nation's economic performance. Obsessive interest in rankings are a key cultural trait of the Taiwanese; playing with the stock market is playing with a major component of the national psyche.
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[Taiwan] Don't miss the comments below! And check out my blog and its sidebars for events, links to previous posts and picture posts, and scores of links to other Taiwan blogs and forums! Delenda est, baby.

Political Theatricals: The Awful Legislature: the Sequel and Procrastination II: F-35s

A mudskipper at Gaomei Wetlands. 在高美濕地. 彈塗魚.

O how beautifully staged! Finance Minister Christian Liu offers to resign because -- in a move no one could have predicted -- the legislature has gutted the proposed capital gains tax....

Minister of Finance Christina Liu (劉憶如) offered to resign yesterday after a capital gains tax she enthusiastically proposed was rejected by Chinese Nationalist Party (KMT) lawmakers at a meeting on Monday.

......

The KMT caucus proposal was far from meeting her expectations of the ability-to-pay principle, because major earners in the stock market would not be required to pay a capital gains tax under this version, she said.

Readers will recall that Christina Liu was one of the front people for the smear of Tsai Ing-wen over the TaiMed case before the election. I thought she might resign then, but she didn't. Perhaps they were preserving her for this moment... she resigns to show that the Administration is Serious About Capital Gains Tax and the legislature then does what the KMT really wants to do -- remember that the legislature is controlled by the KMT and President Ma is Chairman of the KMT Party. All of this is just political theater for the masses: when the smoke clears, capital gains of major earners will still not be taxed, but the Administration can say it tried but alas, couldn't get the perfidious legislature to do what it wanted.

The WSJ has a very detailed discussion from the redoutable Jenny Hsu.  It observes:

"The KMT's proposal apparently favors stock investors and conglomerates which have big positions in the market," said Kevin Wang, an economist at Taishin Securities, who added, "It would be embarrassing to Liu if she stays on."

Naturally, the stock market spiked nearly 3% on the news that KMT legislators were making law on behalf of the 1%.

To complete the cycle, another round of polls will show that the public believes the legislature is the worst public institution in Taiwan, watchdog bodies will publish stern reports, and in the next election, the legislators will all be returned to their seats. Us observers of Taiwan politics will then shake our heads and retire to commiserate with our friend Jack Daniels.

This political theater has another function: with all the focus on the capital gains tax, people have stopped discussing another driver of income inequality -- the assessment of land value, which has not changed since 1987.

Speaking of theatre, how about those F-35s? Last week J Michael Cole in The Diplomat argued that discussion of F-35s was there to take the focus off F-16s and enable the KMT to procrastinate about getting fighter jets as it has now for a decade. By shifting the demand to F-35s, which Taiwan can't afford and which it will never get, the KMT can plausibly claim that it is looking out for the defense of Taiwan. Sure enough, just today the TT reported:

F-35 stealth fighters are the new-generation combat aircraft that best serve the nation’s air defense needs, a military official said yesterday, the latest hint that the government might not be as keen to acquire the F-16C/Ds it has been requesting for years.

It was the DPP government that requested the 66 F-16s, which the US doesn't want to sell, and which the KMT government doesn't want. Keep your eye on the ball -- if at the end of another four years, we have no new fighters, the function of talking about F-35s should become clear.

The only positive interpretation is that the talk of F-35s is for China's benefit, to enable the US to sell Taiwan F-16s as a "consolation prize." Well, we couldn't get F-35s but at least we got something. But I really don't believe that...
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Daily Links:

• Speaking of theater, Bo Xilai allegedly paid mega-star Zhang Ziyi to have sex with him. Struck fear into the Communist Party of China, accumulated vast fortune, slept with smoking hot mega-stars. Bo Xilai is my new hero.
• Changhua farmers once again protest water diversion for the science park. There just isn't enough water in Changhua for everyone's needs....
• Ma government to send off tech crown jewels to China. Of course....

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[Taiwan] Don't miss the comments below! And check out my blog and its sidebars for events, links to previous posts and picture posts, and scores of links to other Taiwan blogs and forums! Delenda est, baby.

What do stock market taxes and F-16s have in common?

I have the terrible feeling that, because I am wearing a white beard and am sitting in the back of the theatre, you expect me to tell you the truth about something. These are the cheap seats, not Mount Sinai. -- Orson Welles

No need to go to The Avengers when we've gotten a steady flow of theater right here in our domestic politics. First the KMT staged a play as pious as any medieval Mystery Play on the proposed new taxes on income derived from securities transactions....

The Executive Yuan yesterday suffered a setback to a major policy for a second consecutive day when Chinese Nationalist Party (KMT) legislators refused to place on the legislative agenda an amendment imposing taxes on income earned from securities.

One of the KMT legislators, Wu Yu-sheng, proposed delaying a review of the amendments, blaming it on being overwhelmed with the beef mess. But who is Wu?

Wu, who has been labeled a loyal soldier of President Ma Ying-jeou (馬英九), yesterday said the “KMT caucus will not do whatever the executive branch wants the caucus to do from now on.”

“The caucus will act at our discretion if the executive branch fails to communicate with lawmakers before a major policy is made,” Wu said.

So... question to my readers: when the "loyal soldier" of President Ma opposes President Ma's policies, is it because he has switched sides, or is it because Ma wants him to? This way the Administration can say it pushed the law but oh so sorry our recalcitrant legislature decided to thumb its nose at us and isn't it a shame that no one can control those unruly lawmakers? [cue crocodile tears]. And lo and behold....

With one month left before the legislative session enters the summer recess, it appears unlikely that the amendments to the Income Tax Act (所得稅法) and the Income Basic Tax Act (所得基本稅額條例) will clear the legislative floor this session.

Alas, the revisions are delayed until the next legislative session. What a pity, eh?

Another bit of theater displayed this week was the F-16s. Remember them? Sometime back in the Qing Dynasty the Taiwan government decided it needed F-16s and sent a letter to the US government asking for 66 F-16s. Well, here we are years later and still no F-16s. No sooner did Obama announce that the US might sell Taiwan a few F-16s the KMT broke out in a cold sweat. Diversion! The prospect of F-35s is raised! No hope of that, but the idea makes a nifty dislocation. Further news came out: the budget might not be there for the new aircraft!

Oscars for everyone! As a longtime observer noted, whenever the US moves forward on the F-16s, the KMT has a sudden bout of budget indigestion, and whenever Taiwan presses on the F-16s, the US refuses to sell. The only problem is determining whether the cooperation is planned in advance or whether both sides are simply acting out roles they both know so well there is no need to notify the other guy in advance.

Yes, Taiwan, what a delightful place to live, so many plays staged for our benefit.
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[Taiwan] Don't miss the comments below! And check out my blog and its sidebars for events, links to previous posts and picture posts, and scores of links to other Taiwan blogs and forums! Delenda est, baby.

Ma Administration takes steps to goose the stock market ahead of the election

The Ma government took two steps aimed at pushing up Taiwan's fading stock market ahead of the election this week. First, as AP notes in WaPo, the government is allowing Chinese banks to purchase pieces of Taiwan banks.

The commission says individual Chinese banks will be allowed to take stakes of up to 5 percent in Taiwanese banks. It capped total Chinese ownership, including by institutional investors, at 10 percent.

Investment by Chinese banks can give Taiwanese lenders access to China’s lending market and bolster their earnings.

Cross-strait financial investments like these are one of the most important goals of Beijing/Ma's economic integration program and the big financial houses backing the Ma administration. This may push the market up.

A second move was announced as well...Taiwan shares jumped as the government announced the commitment of funding from the national stabilization fund to shore up the stock market:

"The announcement of the National Stabilization Fund's possible intervention in the local stock market has successfully bolstered market sentiment, as investors hailed the long-awaited show of strong government support," MasterLink Securities analyst Tom Tang said. Vice Premier Sean Chen said Tuesday that in the wake of the death of North Korean leader Kim Jong Il, which could lead to instability in the region, the NT$500 billion (US$16.4 billion) National Stabilization Fund would enter the stock market.

Kim's death provides a convenient excuse for buying votes on a galactic scale by using public money to subsidize wealthy investors while appearing to spark the market for Taiwan's tens of thousands of small players. Let's not forget that a major institutional investor in the market is the KMT itself, through its large Party-owned investment company. But there's no conflict of interest there....not that any of the major international media will ever report that, either...

The stock market has an outsized influence on the way Taiwanese view their own economic performance, which is probably another reason people panic or cheer depending on what its doing. Recall that in 2008 Ma benefited from what appeared to be a coordinated effort by foreign analysts to pump the Taiwan market in the run-up to the election. It promptly began sliding the day he swore in, and hasn't recovered since.

Polaris cut Taiwan's growth prediction next year to below 4%, a move that I suspect heralds further downgrades of Taiwan's economic performance next year. If Tsai wins, she is going to inherit a formidable economic mess exacerbated by whatever damage the KMT can do in the four months between the election and the transfer of power, and by the intransigence of Taiwan's nigh-on useless legislature.
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[Taiwan] Don't miss the comments below! And check out my blog and its sidebars for events, links to previous posts and picture posts, and scores of links to other Taiwan blogs and forums! Delenda est, baby.

NY Times on the opening

Jon Adams with a very informative, informed, and wonderfully balanced article in the NYTimes on the KMT's opening to China:

The response to all this has been a stock market frenzy, especially by foreign institutional investors. JPMorgan announced a target of 8,000 for the Taiex by year-end (the Taiex closed at 6,485 on Wednesday).

Goldman Sachs upgraded Taiwan shares in general to “overweight” this month, saying in a note, “The rapidity and scope of recent cross-strait initiatives are welcome signals that Taiwan may finally reap the economic benefits from a warmer relationship with China.”

Foreign money is adding fuel to a domestic rally that was already underway. Many investors in Taiwan had begun to bet that the island’s economy was finally starting to pull out of the doldrums. Locals have also responded warmly to the Ma government’s tax cuts (the inheritance tax was lowered from 50 percent to 10 percent, for example).

But many investors seem to have glossed over or willfully ignored the fact that many essential details remain unresolved or undisclosed.

For one, the details of which specific sectors will be open to mainland money hasn’t been finalized.

Taiwan will likely allow mainland investment in 98 industries during the first phase, including automobiles, textiles, rubber and retailing, with detailed rules probably coming at month-end, the Taiwan minister of economic affairs, Yiin Chii-ming told reporters this week. But flat panel and contract chip manufacturing will still be shut to mainland investors for now.

Then, the two sides will have to sign a memorandum of understanding, probably in June or July for stock investments, as well as separate agreements for banking and insurance.

“On the Taiwan side, the government is still keeping their cards close to their chest,” said a Standard Chartered economist, Tony Phoo. “We still don’t have details on everything we’re hearing and reading about, so there’s a lot of market speculation.”

The ballyhooed tie-up between China Mobile and Far EasTone is a good example. Some media reports have portrayed it as a done deal, but the Economy Ministry said this week that telecommunications would not be one of the first sectors opened to mainland investment.

Kevin Yang, chief investment officer at Paradigm Asset Management, added that for now, Beijing is capping Taiwan-bound investment at about 7.2 billion Taiwan dollars, or about $219 million.

“That’s very little,” he said. “I think the market’s overreacting.”

Phil Chu of Grand Cathay Securities and other analysts say foreign investors are betting that Taiwan will be another Hong Kong, where the stock market boomed following its opening to mainland investment.

“I think it’s possible Taiwan’s stock market could double by 2012,” Mr. Chu said. “But it won’t go up as much as Hong Kong’s did.”

Still, analysts see Taiwan’s opening to the mainland as helping the island’s economic recovery in the short-term, and providing a structural boost in the long-run.

China has already played a part in lifting some sectors. Its rural stimulus plan has increased mainland demand for televisions and other appliances, which has increased orders for Taiwan’s high technology companies. The Taiwanese flat-panel company AU Optronics, for example, said it expected sales to mainland television makers to rise 40 percent this year.

That has helped prop up exports somewhat, offsetting continuing weak demand from the U.S. market.

Ironically, the surge in the stock market and Taiwan dollar could actually slow a recovery by making Taiwanese products more expensive overseas.

Investors in Taiwan’s market have been burned before on exaggerated mainland hopes. Last year, for example, the market rocketed in the two months before Mr. Ma’s inauguration, only to plunge steadily afterward as the reality of the global downturn set in.

Still, Mr. Phoo and other analysts insist the long-term picture is bright. “For eight years, Taiwan kept limits on exchanges and investments,” said Mr. Chu. “But since last year, Ma Ying-jeou has steadily adopted opening policies.”

The stock market peaked at near 10,000 in May of 2008 and began an immediate decline, long before the crisis in October. The pic below from Yahoo shows the last two years....

Note that if the market reaches 8,000, it will still be well below its last peak in May of 2008 when Ma was inaugurated, and the peaks during the Chen Administration. Another speculative boom-bust like the last? You make the call...... use this Bloomberg article on the new risks the market is facing...

“In our view, there are only a few remaining catalysts that are not fully priced in,” the strategists wrote. “On the flip side, we see more risks emerging.”

Following the gains, the Taiwanese benchmark index is now valued at 61 times reported earnings, the second-highest in Asia after Japan, compared with its five-year average of 17 times. The market’s price-to-book multiple has also risen to 1.8 times from a low of 1.07 times set in November, HSBC said.

Good luck!
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[Taiwan] Don't miss the comments below! And check out my blog and its sidebars for events, links to previous posts and picture posts, and scores of links to other Taiwan blogs and forums!

Moody's Pulls Out of Taiwan

Lots of interesting economic stuff out there this week. First, those of you who are tracking the story of Chinese drywall poisoning the US, well it has now gone national -- from Florida, to post-Katrina New Orleans, and now all over the US during the housing boom. My wife and I avoid stuff from China like, well, the plague.

Big story this week was pull-out of Moody's Investor's Service firm, of which the Taipei Times editorialized:

The untold story is the lack of interest foreign investors have in corporate bonds and securitized debts from Taiwanese companies, which has long limited the scale of global ratings agencies’ business in Taiwan and is now forcing Moody’s to close its Taipei office. Moody’s pulling out of the local market is a warning sign for Taiwanese capital markets.

In the face of the global financial crisis, it makes sense that the New York-based company itself is undertaking business restructuring to maximize resource allocation. The question is: Why is Taiwan under the spotlight this time?

Many market watchers said that the Moody’s move reflected the fact that the company was facing a saturated market dominated by rivals Fitch Ratings Ltd and Standard & Poor’s Ratings Service.

But that’s a short-sighted assessment. What these market watchers seemed to miss — as suggested by Polaris Research Institute president Liang Kuo-yuan (梁國源) in an interview with the Central News Agency on Friday — is that the Moody’s withdrawal is indicative of Taiwan’s slower pace in internationalizing its capital markets.

Efforts to internationalize the nation’s capital markets are the best way to develop Taiwan into a regional fundraising hub as the government planned. Therefore, the Moody’s closure rings a warning bell in a country where the government is slow to revise outdated financial regulations and its companies are not interested in developing their global visibility in terms of bond issues.

Another statistic released by S&P’s local partner, Taiwan Ratings Corp, showed how few Taiwanese companies have contracted international ratings agencies to evaluate their corporate credit ratings. It said only around 50 of some 1,200 listed companies in Taiwan have their credit reviews published by ratings agencies on a regular basis.

This figure suggests that nearly 96 percent of Taiwan’s listed companies didn’t feel the need to hire ratings agencies to conduct a credit review of their corporate bonds or securitized debts. There are many reasons behind this, but the simple answer is these companies are just too locally focused and cost-sensitive to do so.

The "slow pace" of internationalizing Taiwan's capital markets.... upgrading our financial markets is like fusion research in the states: success is always just a few years away. I was reflecting on this the other day when someone overseas wanted to do a wire transfer into my local account, and found out that our bank, authorized to handle foreign currency, lacks the routing codes that international banks routinely use.

APROC, ah, sweet nostalgia...

The Taipei Times was too kind to invoke "cost sensitivity" as the reason local corporations don't want bond rating firms like Moody's looking at their books. The real reasons are probably more prosaic -- the routine use of multiple sets of books for businesses at all levels -- one for the taxman, one for the investors, and one for the owners -- the complex cross-ownership systems that actually put firms in the hands of relatives and descendants, with funds flowing freely from one corporation to another (see the Rebar Scandal) must have made it difficult for auditors to understand the financial status of individual firms -- there was even a major semiconductor firm here that used to advertise that its ownership was not composed of relatives (they were all school buddies, just as bad). And imagine when someone tried to explain to the Moody's people that, well, they couldn't make any decisions because the boss' wife has all the chops.....

Investors' lack of interest in the bond markets has long been a problem for Taiwan. Back in 2005 the Taipei Times ran a piece that noted that prior to that year, foreign investors had shown little interest in bonds from Taiwan companies.

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[Taiwan] Don't miss the comments below! And check out my blog and its sidebars for events, links to previous posts and picture posts, and scores of links to other Taiwan blogs and forums!

Stock Jock

The pic above shows the year-to-date trend for the Taiwan stock market. It peaked in May when Ma was inaugurated and has been in a free fall since then, plummeting from over 9,000 to under 5,000 yesterday. It fell another 3.7% on Friday, in fact.

With all the news about China's plunging economy, and of course the US, now a train wreck, Taiwan is headed for more bad news over the next couple of years, until (if and when) the global economy recovers. Nevertheless, "maverick" investment guru Jim Rogers, whose appearances here in Taiwan generally make the local news, had this to say in a CNN piece the other day:

What I've been buying recently is agricultural commodities. I've also been buying more Chinese stocks. And I'm buying stocks in Taiwan for the first time in my life. It looks as if there's finally going to be peace in Taiwan after 60 years, and Taiwanese companies are going to benefit from the long-term growth of China.

We've had peace in Taiwan for decades here, Jim. The war guys are on the other side of the Strait. Taiwanese companies have already benefited from growth in China for more than a decade -- in fact they are one of its most important drivers, investing there for the last 15 years or so. And finally, it should be noted that "Taiwan" and "China" aren't going to "make peace," but the KMT and the CCP are going to sit down and dicker on how best to deliver Taiwan to China.

I know market trends today don't predict what will happen tomorrow, but I'd have to question whether now is the right time to get into the stock market here in Taiwan.

UPDATE: As commenter pointed out below, this isn't the first time Rogers has said "it's the first time...." UPDATE 2: As commenter pointed out below, a real stock analyst says casual investors are losing millions here. That ties in with what I've been saying, that it looks like certain entities are pumping Taiwan to make a killing on the little guy. Note that I am not accusing Rogers of anything here.

[Taiwan]

Keeping the Ship Afloat

ALEXANDER: You broke the ship. You broke the bloody SHIP!

Wow! Amazing things happening these last few days in the financial world, with markets going nuts all over. We ordinary joes have learned a lot about how our betters run the world -- we can't switch away from a fossil fuel economy because it will be too expensive, there's no money for education, our infrastructure is falling down, health care for every American is impossibly expensive and will result in a huge government bureaucracy: but hundreds of billions will be available immediately for saving financial firms -- run now by the government -- ruined by their own criminal greed. You look at the mess on Wall Street, and you can't really blame me for being skeptical when the Establishment says its China policy is on the right track.

Here in Taiwan, after the National Stabilization Fund management committee Wednesday said that the government would not activate the National Stabilization Fund, the government overruled itself and announced that in fact it would make the $500 billion fund available to shore up the stock market.

The government decided to activate the state-owned National Stabilization Fund (國安基金) yesterday, an overnight change made ahead of the stock market opening, but it refused to reveal details of how the fund would act.

“The economic fundamentals of this country are still stable, but in view of the sharp decline in the US stock market on Sept. 17 and possible volatility in international financial markets … conditions are right for the fund to enter the stock market,” the fund’s management committee said in a statement.

The press release was issued at 10:10am, just over an hour after the TAIEX had opened down 242.82 points from its close on Wednesday, a drop of 4.19 percent. The benchmark index gained as the day progressed, ending 158.92 points down from Wednesday at 5,641.95, a drop of 2.74 percent.

Meanwhile Savior Ma's magical healing powers being temporarily stymied by the Forces of Miasmic Darkness emanating from Wall Street, he called on Vice President Vincent Siew to save Taiwan:

President Ma Ying-jeou (馬英九) yesterday assigned Vice President Vincent Siew (蕭萬長) to head an economic advisory task force charged with providing the Executive Yuan with recommendations on improving the economy.

Siew said he hoped the task force could meet soon, preferably next week, but that there were still many details to be worked out, which he hoped to finalize in the next couple of days.

Ma emphasized that the task force, which will meet bimonthly, will not be a decision-making body but a communication and consultation platform between the Presidential Office and the Executive Yuan as well as local and international experts. It would not infringe on the executive power of the Cabinet.

The stock market here has assumed an iconic status here, all out of proportion to its actual importance to the economy. In a nation where cram schools broadcast the scores of their high achievers on neon signs outside the school doors, the stock market functions more like a perpetual midterm grade that the national economy must constantly pass, than an instrument to raise capital for local firms.

Meanwhile, out in the real economy, where the rubber of infrastructure spending meets the road of high materials prices, Polaris Securities announced that it expected growth to drop to 4.1% this year. Note that this estimate was based on the assumption that government spending would account for 36% of fourth quarter growth. President Ma expects that infrastructure spending will raise GDP 0.5% this year, but don't count on it: construction companies, already in an industry-wide crisis here, are balking on bidding because of rising prices for raw materials. If Ma doesn't get his infrastructure boost, growth will probably slip below 4%.

The recent visit by typhoon Sinlaku to our shores, leaving 12 dead and wrecked buildings and bridges, has highlighted one of the Administration's most urgent problems: the appearance it gives of being deaf, dumb, diffident, dilatory, and indifferent. Ma needs to shed the Confucian scholar-emperor role, and get out there among the people, and lead.

[Taiwan]

Our Bottomless stock market

The local Chinese papers had front page stories on our collapsing stock market today, with both the Apple Daily and Chinese Times observing that the 4 day fall in the stock market this week had totaled 633 points -- a sardonic comment on Ma's 6-3-3 promise, which Ma said this week was meant to apply for any time up to the last year of his second term. The Taipei Times reported today:

The Presidential Office yesterday defended President Ma Ying-jeou’s (馬英九) “6-3-3” economic policy, saying it was announced before the global economic downturn, that Ma had not abandoned it and that it would apply until 2016.

Presidential Office Spokesman Wang Yu-chih (王郁琦) said that the administration would strive to achieve its goals in spite of the global economic slump.

“2016 is the year by which we plan to achieve all three goals. It does not mean that we have to wait until 2016 to accomplish them all,” he said. “As long as the global economy recovers, it is possible that we can achieve some of the goals earlier.”

Wang made the remarks in response to media inquiries about Ma’s comments that his “6-3-3” campaign pledge was unlikely to be realized anytime soon, but he hoped it could be achieved by 2016 — the end of a possible two terms in office.

The “6-3-3” economic policy refers to the goal of achieving annual GDP of 6 percent, average annual earnings of US$30,000 and an unemployment rate of less than 3 percent.

As of this writing, at about 1:00 on the 5th, the market has continued to fall another hundred points or so. The DPP is calling for a cabinet reshuffle, but it is hard to see what a new cabinet can do about the skidding global economy and falling investor confidence. Why did the stock market fall again yesterday? The Taipei Times reported it was due to Ma's comments on his economic promises:

The TAIEX plunged 172.3 points, or 2.61 percent, to close at 6,412.63 on turnover of NT$91.19 billion (US$2.81 billion), Taiwan Stock Exchange data showed.

Analysts attributed the fall chiefly to panic selling by domestic investors after President Ma Ying-jeou (馬英九) said a day earlier that he could not honor his campaign pledge to achieve economic growth of 6 percent and raise annual per capita income to US$30,000 during his four-year term.

Winson Wang (王榮旭), a stock analyst at Marbo Securities Consultant Co (萬寶證券投顧), said foreign fund managers could not be blamed for the market’s bearish performance yesterday, as they sold only NT$7.7 billion in shares.

“Rather, domestic investors calculated it was better to sell their stock now since the government has no intention of fixing the economy in the near future,” Wang said by telephone.

This was followed by calls to lower the corporate income tax and similar moves. Short-term solutions......



Speaking of leadership and taxes, remember when Vincent Hsiao was touted as the experienced economic development specialist who would take us all to the promised land? He's been working on the tax reform that will lower taxes on business. The Ma government has been arguing that the tax regime should be altered, and industry groups have been using the Milton Friedman Foundation as the apparent source of some simpleminded ads (picture above) that claim that low taxes (left) lead to high economy (right). A commentary the other day in the Taipei Times discussed the proposals:

The Chinese National Federation of Industries (CNFI) is running a TV commercial urging tax cuts to stimulate the economy. The federation has spent large sums on propagating spurious theories in a tedious campaign to brainwash the public and pressure the Cabinet’s Tax Reform Committee in an attempt to manipulate the direction of tax reform. Is the commercial telling the truth?

First, it claims that low taxes equal economic growth, and that high taxes equal economic decline. If this theory is correct, shouldn’t tax havens such as the Virgin and Cayman islands be the world’s most developed economies?

The commentary is long, but points out that high-tax environments are coincident with good economic growth and high living standards, and noting that low tax regimes, like the US, are known for high income inequality and rising government debt. It also rebuts claims that Taiwan's taxes are higher than either Singapore's or Hong Kong's. Well worth a read.

[Taiwan]

Stock Market clunks to 16 month low

Ma save us! The stock market hit a 16 month low yesterday (pic above from Yahoo) as the brilliant financial policies of the rational Ma administration once again boosted our economy. Wait, did I write that wrong? Sorry, for a moment there I thought I was writing for one of the financial papers that pushed Ma so hard during the run-up to the election. Maddog sent me this pic....

...showing how regional bourses have fared since May 20th. Guess who is doing the worst...

Don't get me wrong. I don't think our fall here has much to do with the actions of the Great Savior. It's just that, before the election all we heard was how bad the stock market was thanks to DPP President Chen Shui-bian, who, as the Source of All Evil^©, caused the stock market to fall, the globe to warm, and a comet to wipe out the dinosaurs. The local pro-Blue papers, as well as international economic and financial magizines and other media were constantly pushing this line. Nobody ever put the Taiwan market in the context of global trends or asked whether its performance might be related to its speculative nature, the lack of good reporting by local conglomerates, the lack of shareholder responsibility on the part of corporate managers, and other endemic problems with corporate behavior here. Nope. The DPP was The Problem.

Maybe next time around these guys will take a more thoughtful line.

Yeah, right.

[Taiwan]

Tuesday Quickies

As the typhoon howls outside our windows on its way to wreak havoc in south China, a friend reports that finally, the Taiwan High Speed Rail was placed the word "Taiwan" on their tickets. In ordinary print. On the back. *sigh*

Taiwan News pointed out a little ray of light in an editorial today:

In their status as the Constitutional Court, the 11 grand justices issued Interpretation 644 which immediately struck down Articles 2 and 53 of the Civic Association Law which, respectively, banned civic associations from "advocating communism or division of the national territory" and mandated vetting of new civic organizations and prohibited the registration of any that had such advocations on the proper grounds that such restrictions violated the guarantee of the right of free speech in Article 14 of the Republic of China Constitution.

The interpretation was issued in response to a request by former presidential secretary general Chen Shih-meng to clarify the constitutionality of ban on the "advocation of communism or the division of the national territory" in the Civic Associations Act, which the Taipei City Social Welfare Department cited in 1998 to reject the application for the Goa-Seng-Lang Association for Taiwan Independence (GATI), a group of mainlander "new immigrants" who support independence, to register as a civic organization.

But just in case anyone was dumb enough to think that freedom of speech actually meant, well, freedom of speech, the KMT was quick to disabuse them:

The response of the KMT government to Interpretation 644 reflected its continuing authoritarian mentality. The Ministry of the Interior acknowledged Friday that Interpretation 644 will block the MOI from refusing to register political parties or civic groups that advocate "communism or national division."

However, the interior ministry declared that if such political parties act in ways that "threaten the existence of the ROC or the free and democratic constitutional order," it will apply to the Constitutional Court to dissolve such parties as "unconstitutional."

Similarly, KMT Legislator Wu Yu-sheng warned the opposition center-left Democratic Progressive Party not to take Interpretation 644 as a "protective amulet" to advocate "Taiwan independence" and declared that while advocacy of communism belonged to the sphere of freedom of speech, advocacy of "division of national territory" or Taiwan's independence "involves sedition."

It is worth pointing out that there are now only 11 Grand Justices, four short of the mandated 15, because the KMT-controlled Legislative Yuan refused to confirm four scholars nominated by former president Chen Shui-bian on the grounds that they had "politically incorrect" positions on issues such as whether they believed the R.O.C. still exists or how would they rule on the definition of the R.O.C.'s territory.

In the meantime, the new Ma regime continues make our stock market (go) boom, as today the pro-KMT China Post published the pleadings of the Financial Supervisory Commission Vice Chair....

Financial Supervisory Commission (FSC) Vice Chairwoman Susan Chang called on investors yesterday to have more faith in the local bourse, despite an estimated average loss of NT$440,000 by each stock market investor in the month since the Kuomintang (KMT) government took office.

One month after the inauguration of President Ma Ying-jeou, the weighted index, Taiwan stock market's key barometer, on June 20 recorded a drop of 1,166 points, from 9,068 to 7,902 points. The stock market value slid by NT$2.94 trillion, or 12 percent, from NT$23.3 trillion to NT$20.86 trillion during the same period.

The share prices was trading as high as 9309 points when the market opened on May 20, but have lost steam since.

Finally, Reuters reports that Chinese banks will be permitted to purchase stakes in Taiwan banks.

Chinese banks will be allowed to buy up to 20 percent of their Taiwan counterparts under a plan being developed by Taiwan's banking regulator, local media reported on Tuesday.

The plan being developed by the Financial Supervisory Commission (FSC) is part of a broader series of moves aimed at boosting Taiwan's economy through closer ties with political rival China under the administration of new President Ma Ying-jeou.

The 20 percent ceiling in the plan parallels a similar rule imposed by China, which limits foreign investment in its banks to 20 percent or less, the Chinese-language Commercial Times reported, citing an FSC official.

Here's an idea: our banks are running a bit short due to dodgy loans -- let's bring in the suckas from across the Strait to shore them up.

[Taiwan]

The Alternate Reality of the South China Morning Post

The South China Morning Post, writing from an alternate reality, observes:

In an economic climate haunted by the US recession, soaring oil prices and soaring inflation, Taiwan seems to be sticking out in the crowd. As stock markets dip round the world, Taiwan's Taiex index appears to have an exceptional power to defy gravity. Since his landslide victory in the March election, Ma Ying-jeou seems to have pulled Taiwan out of its nine-year economic stagnation....

Maddog alerted me to this piece of either supreme incompetence or witting propaganda -- take your pick -- and passed me a link to the TSEC Weighted Index. Above is the picture for the last three months. Note the anomalous peak on May 19-20, the day Ma was sworn in. Since then, except for the minor recovery a couple of days ago, it's been nothing but downhill -- lower than under the last few months of Chen Shui-bian, continuing a trend that began a couple of months ago.

Nine-year stagnation? We are now in our 28th straight month of expanding exports, and growth last year ran at 5.7%. UPDATE: First quarter of this year, growth was 6.06%. The investment firm UBS notes of this year:

UBS, the world’s largest manager of private wealth assets, said yesterday the economy would reap benefits from the arrival of Chinese tourists starting on July 18, but it might not be the economic godsend many have hoped for.

“Even if 10,000 Chinese were allowed to visit a day and spent NT$15,000 each during their stay, it would only raise the nation’s GDP by 0.5 percent,” said Kevin Hsiao (蕭正義), a chartered financial analyst at USB Wealth Management Research Taiwan. “But the public sentiment here is that they will bring in a huge fortune and fix the economy.”

Under the agreement between Taiwan and China, 3,000 tourists will be allowed per day.

Hsiao was optimistic about the economy, however, and raised his forecast for economic growth from 4.1 percent to 4.5 percent for this year, citing the the nation’s better-than-expected performance in the first five months.

In other words, Ma has rescued our economy by lowering year on year growth from 5.7% to 4.5%, and making the stock market fall. But why let reality intrude on cheerleading?

Once again, the nation's problem isn't economic performance, but economic inequality. That is a growing structural feature of our economy that the KMT is unlikely to address.

On a personal note, we went out this week and bought bikes for ourselves. Interestingly, we visited several shops and they all said the same thing. Thanks to rising gas prices and rising recreational use, demand for bikes is high, and they are having trouble maintaining inventory levels.

[Taiwan]

The Bubble That Ate the Universe

What's going on in China now? David Webb, a major figure in Hong Kong investment circles, has a wonderful analysis of the stock market bubble there:

The vast majority of individual investors in China today have never experienced a serious market correction, and have only the simplest understanding of the market. All that they know is that almost everyone they know has made gains on their stocks, so they jump on the bandwagon. What they don't know is that the bandwagon is heading for the edge of a cliff. Like a giant Ponzi scheme, when everyone has bought in, there will be nobody left to pay them a profit.

By definition, bubbles are markets whose valuations are unsupported by fundamentals. There is nothing to fall back on. Bubbles never just plateau and go sideways - because that would not satisfy investors who bought in expectation of continued rapid gains. As soon as the momentum runs out, those investors head for the exit, and with nobody willing to take their place, the market crashes, usually overshooting fundamental value on the downside. Just a return to the index level of 20 months ago, when valuations of some stocks were beginning to look reasonable, would be a drop of 78%.

Like avalanches and other non-linear phenomena, nobody can exactly predict when a bubble will burst. All they can do is look at the accumulating snow on the mountain, and decide that it is not a good time to go skiing. By staying indoors, they might miss out on some great skiing, but they can be certain of avoiding burial in an avalanche.

Webb points out that this Bubble reminds him of the Taiwan market bubble in 1990, whose peak at over 12,000 has not been approached since. Investors then were similarly naive, had never known a market that fell, and were similarly engaging in irrational exuberance. The Economist noted recently:

However, Paul Cavey, a China economist at Macquarie Securities, suggests that China may have more in common with Taiwan in the 1980s than with Japan. Taiwan's bubble was even bigger, with share prices rocketing by 1,800% between 1985 and 1990. In Japan, reserve accumulation did not play a big role in the bubble. By contrast, the foreign-exchange inflows into Taiwan were greater in relation to its GDP than those seen recently in China. Taiwan, like Japan, saw a big rise in its exchange rate, by 60% in the four years to 1989.

What might happen when that Bubble goes ka-boom! is anyone's guess. It's larger than the Japanese Bubble whose pricking sent the economy into an eternity in the Slough of Despond. Webb optimistically predicts that it might lead to greater media freedom -- as Webb astutely observes, the government's grip on the media is feeding false hopes with reassurances that everything is under control, while at the same time preventing investors from learning the truth. My own feeling is that history is not exactly replete with instances of economic collapse leading to greater freedom for all -- at least not without a long interregnum of chaos. In addition to the swath of misery and destruction it will cut through Chinese society, the politico-economic fallout might be profound. For example, consider this tidbit from Newsweek last week:

The quantitative similarities between the two countries are alarming. Fixed- asset investment (construction of ports, factories, condos, etc.) now accounts for about 45 percent of China's GDP. Its trade surplus has grown from almost nothing in the late 1990s to 9 percent of GDP today. Meanwhile, private consumption has shrunk from half of total economic activity in the late 1990s to just 35 percent this year. By comparison, Japan's investment component averaged 30 percent of GDP during its peak growth years, its trade surplus topped out at 4.5 percent of GDP and its consumption levels never dipped below 58 percent of GDP. Conclusion: China's economy is currently more out of kilter than Japan's ever was.

Katz has coined a term for the problem: economic anorexia. He defines it as a nation's chronic inability to consume all that it produces—a malady that leads to bloated trade surpluses, asset bubbles and ultimately collapse.

If private consumption in China -- already comparatively nothing to write home about -- nosedives in the wake of a Bubble going boom!, the effect on Taiwan -- and its elections -- and its security -- might well be profound. Many Taiwanese are investors in that market one way or another. Taiwanese businesses do well in China and the island runs a trade surplus with China. But if that Bubble bursts in December -- how will it affect the elections in January and March? The Taiwan economy will take a staggering blow. And if the resultant political fallout challenges the legitimacy of the Communist government, what foreign adventures might it be willing to engage in?

Oh, and what happens to the dollar when the Bubble blows and China can't soak up all those dollars the Bush Administration printed for its madness in the Middle East?

[Taiwan]