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TAIEX tumbles NT$700 billion in three sessions-Courtesy of The China Post

Friday, April 6, 2012
TheChina Post news staff

The aggregate market value of all the shares listed on the Taiwan Stock Exchange shrank by NT$700 billion as a result of the weighted share price index plunging in the past three consecutive trading sessions of the week on fears that the government will impose a capital gains tax on stock income, according to market sources.

A downtrend on Wall Street overnight and the lackluster results of the latest government bond auction in Spain raised worries that further volatility on the global financial markets will create jitters for the local bourse, dealers said.

Market sentiment was further dampened by the possibility that the government might raise electricity rates, after recent hikes in domestic fuel prices became effective April 2, they added.

The market opened down 2.25 percent and moved to the day's low amid lingering concerns over the possible tax on stock investments and an impact on enterprises' profitability due to hikes in fuel prices and electricity rates, dealers said.

The local bourse recovered part of its early losses on bargain hunting yesterday. The weighted index closed down 121.03 points, or 1.55 percent, at 7,639.82, after moving between 7,528.03 and 7,667.04 on turnover of NT$95.91 billion (US$3.25 billion).

However, select large cap stocks, such as smartphone vendor HTC and flat panel maker AU Optronics (AUO), attracted buying as investors took advantage of their low valuations to help the broader market recoup part of the early losses.

Although the market is likely to stage a technical rebound soon after recent heavy losses, the capital gains issue is expected to keep affecting the market movement.

Fears over Lack of Consensus

Rumors emerged that some foreign institutional investors might withdraw from the local bourse on the capital gains tax issue, but Cheng Cheng-mount, chief economist at Citibank Taiwan Ltd., noted that this would be a kind of overreaction, adding that the issue wouldn't undermine the willingness of foreign investors to purchases those shares enjoying good profit records.

Cheng stressed that what foreign institutional investors fear most is the possible failure to reach a consensus on how to levy stock gains tax among members of the sound finance task force under the Ministry of Finance, and the resultant lingering uncertainty of the tax issue.

Cheng continued that the government should finalize capital gains tax policy as soon as possible, so that foreign investors can have more time to work out countermeasures.

One-month Market Plunge Nightmare?

As Finance Minister Christina Liu pledged on April 2 that her ministry will put forth official reforms for a capital gains tax within one month, individual investors raised the question: “Should we face the nightmare of seeing the local bourse plunge for one month?”

The investors hoped the government can work out a clear-cut policy on a stock gains tax as soon as possible. They complained about their increasingly disadvantaged position in terms of investments. First, they have to face a 0.3-percent securities transaction tax when starting stock investments; second, they should pay income tax for stock or cash dividends they earn; third, their stock investment gains will be taxed in the near future; and fourth, they may face an extra health insurance premium payment when the second-generation national health insurance program is put into practice in 2013.

Securities Houses, Insurers to Bear the Brunt of Impact

On another front, Morgan Stanley Securities Taiwan said that if the capital gains tax is imposed on stock investments, it will constitute major a impact on the securities brokerage houses, financial shares and insurance firms.

The company said that the tax would undermine daily stock market turnover, thus seriously eroding the profitability of securities brokerage houses.

Meanwhile, as insurance firms usually maintain high stock investment positions, the capital gains tax would reduce stock investment gains that could otherwise be realized. In addition, a capital gains tax would also be applied to realty transactions, making leading insurance firms with heavy investments in the realty market suffer doubly.