It's just a small tax on stock trades, but it's producing a giant uproar in Taiwan politics. In late February, Premier Vincent Siew succumbed to pressure from President Lee Teng-hui to scrap the current 0.3% transaction tax and give the market a lift. By doing that, Lee sided with the island's tycoons who are desperate to avert a severe market slide. Before caving in, Siew had seen no reason to give the bigwigs a break. No matter. Opposition legislators, angry with Siew's backsliding, called a no-confidence vote against him to assert his accountability to parliament, not Lee.
Siew survived the vote, but that's not the end of the problem. Taiwan is finally feeling the pinch of the crisis, with its economy slowing, its banks showing sure signs of trouble, and its stock market in a slide that has pushed shares down 32% since last March. The government, long accustomed to running a booming economy, is scrambling to react. The result: a growing debate over whether to use the crisis as a basis for real reform, or as an excuse to prop up the markets and relieve the mounting money woes of the ruling Kuomintang's cronies.
At the root of the controversy is the peculiar nature of Taiwan's economy, a mix of crony-dominated banks and stock players and sophisticated, high-tech exporters. Many fat cats in Taiwan play the markets in ways that would give U.S. regulators fits. Major shareholders often spread positive rumors about their own firm, then buy and sell shares on the good news without notifying regulators. The proceeds go to pay company debts or pad the bottom line. Troubled firms find these manipulations an easy way to paper over operating losses. "Almost all the medium-size groups with problems are doing the same thing," says Norman Yin, a reform-minded finance professor at National Chengchi University.
BEARISHNESS. But with the market dropping steadily, the speculators are in trouble. Many have borrowed heavily to finance their schemes. Now that bearishness prevails, they cannot push up their stocks as they once could. Thus a spate of companies, such as developer Kuo Yang and lockmaker Tong Lung, have defaulted on loans. More bad news is expected. The chairman of Universal Scientific Industrial Co., for example, was just forced out for running a failed scheme to prop up his firm's stock price.
A corps of academics at leading universities and technocrats at the Finance Ministry wants to clean up Taiwan's Wild West stock market before it spins out of control, crashes, and wipes out the investments of millions of ordinary Taiwanese. They argue the government's move to suspend the stock tax will just encourage more money to flow into Taipei's poorly regulated bourse. "Business groups usually apply pressure under the table, but this time they are right on the surface," says Kuo Wen-jeng of Chung Hwa Institute for Economic Research. "Some of them are becoming more desperate."
For the moment, the advantage clearly belongs to the tycoons, such as Liu Tai-ying, chief of the KMT's vast business empire, who supports scrapping the stock tax. The government has already done plenty to bail out the markets. It has organized an $8.6 billion stock market support fund and urged banks to roll over bad loans for an additional six months. The government has even relaxed margin-trading rules in an effort to juice the market.
These moves put Siew in a tight spot. The reformers want to push through new regulations to wipe out stock manipulation and install some serious oversight of the banking system. They also want the government to stop intervening and let market forces, not stock touts, decide who the winners and losers are. As with the stock tax, Siew appears to believe the reformers. But taking their side is to invite a collision with Lee, who is looking for a scapegoat to take the blame for the economy's decline. So Siew will proceed cautiously in his support of change.
The reformers' best hope is that next year's presidential election will turn into a referendum on reform. The no-confidence vote against Siew suggests plenty of legislators and voters want to punish the KMT for allowing cronies to influence policy. Maybe, as the election approaches, the reformers will gain the upper hand. Meanwhile, the crisis will just deepen.