Issues: Curbing the Stabilization Fund

The government is taking a more conservative attitude about intervening in the market at times of economic or political instability.


Although the government did not activate the National Stabilization Fund to intervene in the securities and foreign-exchange markets after election day last month, when the dispute over the legitimacy of the vote and the impact of the shooting of the president caused widespread if momentary investor nervousness, media speculation at the time that the mechanism might be used has triggered renewed discussion about the appropriateness of the Fund. While some local investors demand that the government infuse money into the market during periods of economic or political stability, most foreign investors are against the practice, preferring to see the government uphold the workings of the market without exception.

Last month the government chose not to take action because "there weren't any signs of disorder in the market, and the government fully respects the free-market mechanism," a finance ministry official told TOPICS. The official added that past experience has brought evidence that Taiwan's stock market is growing more mature, less easily affected by particular events.

On March 22 -- the first day the stock market opened after the election -- the TAIEX dropped by 6.7%, the second largest one-day decline in recent years. The next day it dropped by another 2.9%, but on March 24 it rose by 0.66% and then maintained a rising trend for the following week.

The National Stabilization Fund was introduced in February 2000 and has been put into effect two times. According to the National Stabilization Fund Act, the purpose of the fund is to help stabilize the stock market if it is being disturbed by any unusual factors originating either domestically or overseas. The total sum at its disposal is NT$500 billion (about US$15 billion), of which NT$300 billion comes from four government-run funds while the rest may be borrowed from public banks.

The first time the fund was used was in March 2000 when the government invested NT$50 billion in the market. That was right before and after the presidential election when the political situation was unstable due to the first transfer of governmental power. The TAIEX rebounded after the funds were invested. In October of that year, another NT$120 billion (US$3.6 billion) was injected into the market following heated controversy over the government's decision to halt construction of the half-built fourth nuclear power plant. The fund remained in operation for more than a month that time, helping to ease the TAIEX through the crisis. Among the total of NT$170 billion (about US$5 billion) the Fund has invested, NT$102.8 billion (around US$3 billion) in holdings have been sold, leaving NT$71.4 (over US$2 billion) still invested. Up to last December, the Fund had incurred a loss of NT$26.5 billion (US$803 million).

Calls to activate the fund were raised again following such events as the September 11 terrorist attack, the invasion of Iraq, and the SARS outbreak. But the government refrained from re-activating the mechanism on those occasions. Finance officials say they know that the confidence of foreign investors would be affected if the government interferes excessively in financial markets.

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