The Great Taiwan Bubble Chapter 4

Chapter 4: The Crash and the Rasputin Market When the Taiwan Stock Exchange index closed at 12,495 on February 10, 1990, no one rang a bell to announce that the last breath

of

Nothing

air

had

special

been

blown

happened

in

into that

the

great

short,

two

Taiwan

bubble.

hour

Saturday

trading day to cause the market to begin imploding.

It simply

seemed to have reached the outer limits of its self propelled chain

reaction,

and

a

small,

seemingly

insignificant

rupture

appeared on the surface of the tightly stretched bubble as the great

deflation

began

the

following

Monday

morning

in

slow,

almost imperceptible increments. The market had closed 1989 at 9,624, down just 10% from its September peak of 10,773, and very few market players doubted that there were bigger things to come.

In January, the TSE

index recorded one of the market's finest performances ever, rising by more than 25% in a single month for only the fifth time since the beginning of the massive bull run three years earlier.

The market was up another 4% by February 10th, and was

now up 144% since year-end 1988, up 433% since year-end 1987, and up a whopping 1103% since year-end 1986.

Market turnover

shot up to over $5 billion on the average day with more than 1.2 billion shares changing hands per three hour trading session. Taiwan's market capitalization represented over $300 billion in aggregate wealth spread among the fraternity of the island's market players, and nearly all of them felt rich and invincible. This retired

sudden soldiers,

avalanche

of

dancehall

wealth

had

hostesses,

propelled and

janitors,

messengers

into

respected personages in the brokerage community, and uneducated punters without the slightest conception of corporate finance or the dynamics of markets developed cult-like followings among the

even

less

knowledgeable

players

who

only

months

before

had

manned assembly lines in grimy industrial districts or bussed tables in local restaurants. When the market opened on Monday morning, February 12th, the

index

dropped

by

3%

to

12,126,

which

was

in

no

way

remarkable, and several days of inconclusive trading followed. Stock prices rallied 4% to 12,273 on Friday the 16th, off less than 2% from their peak, and the exchange looked pretty much like its rambunctious old self.

The TSE then lost ground slowly

and steadily, never by as much as 2.5% in a single session, on four of the last five trading sessions in February, closing the month at 11,662, off 6.7% from the top, but down only 3.3% for the month.

Market turnover continued to rise and reached the

astonishing average level of $5.6 billion per day.

The average

volatility of the market in February was slightly more than 2% per day, up slightly from January, but about average for recent months. The market dropped 2.1% to 11,420 on March 1st, but fell by 2% or more on only five other trading sessions during the month. The most volatile days were actually a pair of rallies with increases in stock prices exceeding 4% on each occasion, and the

market

closed

the

month

at

10,756,

down

7.8%

from

the

previous month-end and off 14% since the peak. The

back-to-back

monthly

declines

in

February

and

March

were the first experienced by the TSE index since 1986, but almost no one was sweating it very much at this point.

It all

looked

before

like

the

market

was

just

taking

a

short

rest

scaling new, uncharted heights as it had done so many times before, and the armies of punters were being alerted to "buying opportunities"

by

their

ever

optimistic

and

alert

brokers.

Volatility had actually declined to under 2% per day, and it was

common knowledge that the market was "stabilizing" after its series

of

dramatic

new

highs.

After

all,

factoring

in

the

January rally, the index had actually gained 11.8% for the first quarter as a whole. While most players were still heavily into denial, I wrote my own assessment of the market in the first quarter report to shareholders of The R.O.C.-Taiwan Fund: "Taiwan's bull market is showing signs of age.

The extremely high prices and levels of

daily trading appear to be unsustainable, and the recent sharp correction in Japan is evidence that no market is permanently immune from economic and financial fundamentals." 1 Based on these risks, I had continued selling stocks to raise cash in our portfolio and insulate our shareholders from market risks.

By quarter end, I had 29% of the portfolio in

cash equivalents, which was near the limit I could go to without special

board

position,

our

approval. fund's

Even

net

asset

with

this

value

conservative

gained

9%

equity

during

the

quarter, capturing most of the market's last, wheezing upward momentum. The TSE index opened April and the second fiscal quarter of the year with a 3.4% rally, but dropped nearly 12% in the next three trading sessions to 9,828, the market's first close under the mystical 10,000 level since early January.

This sudden drop

included a record 612 point or 5.9% fall on April 7th when 192 of the 196 shares that traded that day dropped in price.

By

month-end, the index had drifted down to 9,292, off 26% from its record

high,

and

the

"correction"

appearance of something more ominous. share

1

prices

edged

up

to

2.6%

per

began

to

take

on

the

The average volatility of day,

and

Champion, Steven R., "First Quarter Report," The R.O.C.-Taiwan Fund, Taipei, March 31, 1990.

average

daily

turnover on the exchange dropped to just under $4 billion, off 29% from February's peak level. The TSE index plummeted 6% to 8,735 on May 1st, setting another record and bringing it back to its peak 1988 level.

The

market declined 6% or more on seven trading sessions during May, and experienced nine daily declines in excess of 5%. The index fell a record 6.7% on May 25th to a monthly low of 6146, and 190 of the 201 shares that traded that day hit their legal trading floors to set yet another dubious market record. These sharp drops in stock prices caused underground margin lenders to demand more cash to shore up their stock financing loans to market players, and the players either complied if they could,

or

they

were

sold

out

of

their

positions,

were

"decapitated" in local market slang, by the suddenly not so friendly black market lenders. 2 One analyst was quoted in the local press lamenting, "We can't see any positive support. the

plunge."

3

Other

analysts

We only see a continuation of optimistically

saw

imaginary

"support levels" at either 6,000 or 7,000 on the TSE index. 4

The

market had become an even hotter potato for the government, with most

officials

noting

that

regulation

and

management

of

the

stock market simply wasn't in their job description. A

spokesman

in

the

Presidential

Palace

announced,

"President Lee Teng-hui is quite concerned about the continuous falls of the stock market, but he won't issue any opinion on how to counter this because it's the Executive Yuan that should handle the issue."

Lee Huan, the Premier and out-going head of

2

Stock Market Falls Record 6.34% as Investors Cut Their Losses," The China Post, May 19, 1990.

3

"Stock Market Suffers Record Fall of 6.7%," The China Post, May 26, 1990.

4

Ibid., The China Post, May 19, 1990.

the Executive Yuan, quibbled a bit on this, however, noting that it wasn't actually his department either since he would soon be replaced in office by General Hao Pei-tsun.

"As head of a

caretaker Cabinet, I'm not in a position to introduce any major policy, which should be up to the next Cabinet leader," Premier Lee diplomatically demurred. 5 Looking on the brighter side of the market disaster, one manufacturing executive was quoted as hoping that "the continued downward trend will prompt workers to return to their original jobs to ease the labor shortage." 6

This wishful thought proved

to be an accurate prediction of the behavior of many discouraged small time stock players as thousands of them trooped back into low level jobs in Taiwan's service industries.

The Pearl River

Restaurant, for example, was able to fill seventy positions that had been vacant since the bull run started, and the Soohang Castle Restaurant was able to replace all its temporary workers with full time staff who were happy to have a regular job.

7

Evergreen Marine, one of Taiwan's premier companies, was pleased to see many seamen return to their jobs after unhappy interludes in the stock market, and one ship captain returned to the bridge after he ran through all his life savings. 8 At this point, the Taiwan stock market was down more than 50% from the February peak, but rallied a healthy 19% to 7,290 by May 31st.

From the February peak to the late May trough, the

market's decline exceeded that of the 1988 debacle following the surprise

imposition

transactions

and

was

of in

a

capital about

the

gains same

5

Ibid. The China Post, May 26, 1990.

6

Ibid., The China Post, May 26, 1990.

7

"Bourse's Downturn Helps Ease Labor Shortage," The China Post, May 21, 1990.

8

"Stock Market Crash Bolsters Workforce," The China Post, November 17, 1990.

tax

on

league

securities as

Taiwan's

version of the great worldwide market crash of 1987. Average daily volatility leaped to over 4% per day during May, and daily trading on the exchange declined sharply to $3.0 billion. Since the market's peak of only three months before, more than $150 billion in paper wealth, far more than the country's foreign

exchange

leaving a trace.

reserves,

had

simply

melted

away

without

Demand for luxury goods began to decline, the

property market faltered, and business in expensive restaurants and nightclubs nose-dived. Taiwan's booming demand for luxury autos stopped dead in its tracks with Mercedes Benz recording a 70%

sales

drop

compared

to

the

prior

year.

Sixty

thousand

unsold cars sat on dealer lots and another sixty thousand piled up in the Keelung customs warehouse. 9

Real estate speculators

slashed prices by 40% or more on luxury flats they had purchased only months before in the heady days of the boom in order to raise badly needed cash 10 , and 150 of the country's 380 licensed real estate brokers shut their doors for good 11 . As market players, which is to say nearly everyone on the island,

reacted

medical

profession

melancholic attributed

to

these

suddenly

noted

sharp

behavior to

stock

among market

the

changed

circumstances,

increases

in

populace

much

related

stress

12

hyperactive of .

which

the and they

Psychiatric

patients confined in the Taipei Municipal Sanitarium leaped by 75% compared to the previous year, and out-patient consultations were up by 19%. Both these increases were linked to the plunging stock market by mental health professionals 13 . 9

"60,000 Cars Stockpiled in Keelung Warehouse," The China Post, July 9, 1990.

10

"Real Estate Market Losing Its Luster," The China Post, May 6, 1990.

11

"Real Estate Slump Hurts Island's Real Estate Brokers," The China Post, May 12, 1990.

12

"Doctors Warn of Health Risk from Stock Market," The China Post, March 10, 1990.

13

"Rise in Mental Illness May Be Linked to Stock Market Slump," The China Post, July 17, 1990.

TAIWAN STOCK EXCHANGE INDEX January, 1987 - December, 1990 14,000 12 ,4 9 5 12,000 10 ,10 6 10,000

TSE Index

8 ,7 9 0 8,000

6,000 4 ,6 7 3 4 ,9 8 1

4,000

2,000

2 ,5 6 0

2 ,2 9 8

0 J an-87

J ul-87

J an-88

J ul-88

J an-89

J ul-89

J an-90

J ul-90

As June trading began on the TSE, the optimists hoped that the market would rally off its recent lows, and why not? always had done so before.

It

They appeared to be right at first

as the market extended its late May rally into June with backto-back gains to 7,857 on the index, up nearly 8% from the previous month-end and up 28% from the recent trough. On Monday morning, June 4th, however, the bottom seemed to drop out of the market as it plunged 6.5% during that three hour session, and then it went into free fall with successive drops of 3.7%, 6.7%, 2.2% 5.5% and 2.7%, to close off a horrendous week with a 24% plunge to 5,933. hearted

of

intermittent

rallies,

With only the most faint the

market

continued

its

seemingly unstoppable decline to 5,050 at June 30th, down 31% in the month, 53% for the quarter, and now 60% below its peak of only four and a half months ago, representing market losses of

over $185 billion in the aggregate.

The stock market's average

daily volatility stayed at the 4% level, and market turnover continued its decline to a daily average of $2.6 billion. Almost all shares traded on the TSE suffered in this market carnage, but the small, speculative stocks and full delivery shares which had led the market on the way up suffered the most. Cathay Plastics, a full delivery stock, was down 92% in the quarter; Nan Gang Rubber was off 83%, and Tay Feng Tire was down 82%.

Only two shares recorded gains during the quarter, but the

conservatively managed blue chips fared much better than the market

averages.

For

example,

President

Enterprises

fell

a

relatively modest 33%; Asia Cement fell 34%, and Teco fell 40%. In my second quarter letter to fund shareholders, I voiced thoughts that were no longer quite so far out of the mainstream, noting that "The long awaited market correction hit Taiwan as stocks declined for the fifth straight month. this

dramatic

decline

are

now

rippling

The effects of

through

the

(Taiwan)

economy with bounced checks, settlement problems, and financial crises in parts of the brokerage industry.

The extent to which

this will impact the rest of the economy in Taiwan is still unknown, but there is room for concern that serious consequences could result in areas exposed to speculative excess." 14 .

I had

raised the fund's cash position to 32% at quarter end with the approval of our board, and due to this cash cushion and to our policy of investing only in the strongest, blue chip companies, our losses in the fund for the second quarter were just under 35%, much less than the decline in the market as a whole.

14

Champion, Steven R., "Second Quarter Report," The R.O.C.-Taiwan Fund, Taipei, June 30, 1990.

Taiwan Market Volatility January, 1990 - January, 1991

Standard Deviation of Daily Returns

5%

4 .8 %

4%

3%

2%

1%

0% Jan-90

A pr-90

Jul-90

Oct-90

Jan-91

The precipitous fall continued into July with the index falling

another

10.3%

during

the

month's

first

two

trading

sessions to close at 4,525, but the market had not entirely lost its animal spirits and rebounded 24% from this trough to 5,618 at month end.

Market turnover continued to fall, reaching just

over $2 billion per day, and volatility remained high at 3.8% on the average day. The

rally

extended

through

the

August

1st

trading

day,

lifting the market to 5,771, but panic selling again hit the market the next day with the index off 5.6% in three hours of trading

to

5,450.

The

rout

continued

over

the

next

seven

trading sessions as Taiwan's stock market reacted emotionally to the Gulf crisis and the sell-off in the drastically overvalued Tokyo

market

with

successive

6.8%,2.8%, 6.7%, 3.3%, and 5.1%.

daily

losses

of

5.9%,

2.4%,

August 7th's 6.8% drop was yet

another downside record, and 202 of the 207 issues traded that day hit and stayed at their legal trading floors.

When the dust

settled from this debacle, the market had reached 3885, down 33% from August 1st and 69% over the six months since the February peak.

Average daily turnover fell further during the month to

$1.3 billion, and market volatility in August reached an all time high of 4.8% on the average day.

At this point, $213

billion in the country's aggregate wealth had disappeared into thin air, and six brokerage houses had already gone under in the market typhoon. Among those threatened by the surrounding financial storms were solid business groups which had only recently been lured into the securities business by the seemingly effortless profits there

for

Taiwan's

the

largest

affiliates losses,

asking. tea

suffered

and

customers.

This

producer from

included and

Ten

retailer,

embezzlement,

unrecoverable,

illegal

Ren

Enterprises,

whose

securities

unauthorized

margin

loans

trading

made

to

its

These losses threatened the existence of the entire

group, which Chairman Li Rui-he had built from nothing over a period of thirty years. 15 "Big Tuna" Chuang's Hai Ba Wang Group, which operated a successful, if somewhat hazardous, chain of seafood restaurants, and

had

entered

motivations.

the

Market

securities rumors

that

business the

with

company's

similar brokerage

subsidiary had embezzled customer funds and engaged in illegal stock trading prompted the "Big Tuna" to call a press conference where

he

beat

his

chest

and

proclaimed,

"If

Hai

Ba

Wang

embezzled even a single share from customers, I'm willing to face

capital

punishment."

16

Warming

to

the

subject

of

the

differences he perceived between the restaurant and securities businesses, he went on to note, "My family and I have never 15

Liu, Philip, "The Tempest that Escaped the Teapot," Business Taiwan, July 23-29, 1990.

16

"Firm Places Ads Denying Any Financial Problems," The China Post, July 18, 1990.

bought stocks. counterfeit

How is it that you can go to jail for printing

money,

but

not

for

printing

stock

Stocks are things that can cheat people.

certificates?

I definitely don't

play stocks." 17 One of our company's former junior securities analysts, now a

kingpin

at

a

local

brokerage

"Psychologically, everyone is uneasy.

house,

commented,

Whatever buyers there are

cautious, and there is dread of the Middle East situation and of a collapse here." 18 TAIWAN STOCK EXCHANGE TURNOVER January, 1987 - Decem ber, 1990 $7

$ 5 .6 $ 4 .8

$5 US $ Billions

Average Daily Turnover

$6

$4

$3 $ 2 .0 $2

$1

$ 0 .8

$ 0 .7

$0 Jan-87

Jan-88 Jul-87

The trading

market session,

opened and,

Jan-89 Jul-88

down

Jan-90 Jul-89

nearly

with

Jul-90

6%

brief,

in

September's

intermittent

continued its full scale, headlong retreat.

first

rallies,

Trading remained

extremely volatile, averaging just under 4% per day during the month and with eight sessions seeing changes of more than 5%. 1990年

7月

18日. 

17

王信人, “海霸王證券董事長開記者會展現實力,”聯合報表

18

"Gulf Crisis Deepens Gloom in Taiwan's Weak Stock Market," The China Post, August 11, 1990.

By September 30, the end of the year's third quarter, the market had fallen to 2,705, a decline of 26% for the month, 46% for the quarter, and of 78% from the market peak of only seven months before.

Turnover

relatively

on

benign

the

$800

TSE

continued

million

on

to

the

fall

reaching

typical

day,

a

and

volatility remained at the 4% level on average. During the September rout, a prominent securities analyst noted,

"This

is

not

news

anymore,"

and

continued

with

the

logical absurdity that shares were really selling below their "market values" whenever the TSE index was under 5,000.

Another

highly respected analyst and portfolio manager predicted that half the existing brokerage houses would face bankruptcy and went on to note that, "It could be said that investors were not only got (sic) their fingers burned but also had their arms tore off.

Some of the highly geared investors are on the run to

avoid being caught by creditors.

They were simply too greedy or

ignorant and they got badly mauled." 19 The phenomenon of $2.2 billion in "locked funds," or shares of stock held by local financial institutions in connection with government orchestrated market support operations, overhung the market like a black cloud. houses,

and

insurance

These institutions, banks, trust

companies,

were

afraid

to

sell

and

recognize the securities losses on their income statements, but no one knew how long they could hold out before they were forced into

further

panic

sales

that

could

prolong

and

deepen

the

market catastrophe. 20 During the third quarter, I had increased our fund's cash position even further to 40% with the permission of our board,

19

Chan, Danny, "After the Party," The China News, June 11, 1990.

20

"'Locked Funds' Worry Large Investors," The China Post, September 28, 1990.

and

that

decision,

along

with

our

conservative

policy

of

investing in relatively strong, blue chip stocks, limited the fund's losses to 29% for the quarter, again better than the overall market by a wide margin. shareholders,

I

noted,

In my third quarter letter to

"Although

the

market

has

fallen

precipitously from its February peak, we remain cautious due to the extreme market volatility and the uncertain state of many corporate balance sheets.

As we are better able to access the

likelihood

corporate

of

a

major

credit

crisis,

we

may

selectively increase the percentage of fund assets invested in the

most

liquid,

least

leveraged,

and

best

managed

local

corporations." 21 On October 1st, the TSE index dropped another 5.4% to 2,560 and turnover on the exchange slipped to $450 million, ending one of the great market routs in history.

The index was down a

stunning 80%, representing aggregate losses of $250 billion to be absorbed by Taiwan's now somewhat humbled congregation of stock players.

To put this financial disaster into historical

perspective, Wall Street had seen a decline of 89% in the Dow Jones Industrial average from the 1929 peak to the 1933 trough of the market.

More recently, the Hang Seng index in Hong Kong

had declined 91% from its 1972 high to its 1973 low. these

cases

of

infrastructure

was

extreme severely

market

collapse,

impacted,

and

In both of

the

people

financial lost

their

confidence in equity markets for years to come. The question on everyone's mind in the aftermath of the Taiwan crash was the extent to which this world scale market calamity would spread into the country's real economy.

The

disaster scenario called for the massive losses in market value to 21

lead

to

margin

calls,

forced

panic

selling

of

Champion, Steven R., "Third Quarter Report," The R.O.C.-Taiwan Fund, Taipei, September 30, 1990.

remaining

securities

positions,

failed

settlements,

bounced

checks,

personal and corporate liquidity crises, panicking banks calling back lines of credit, and frantic depositors creating bank runs and corporate bankruptcies.

Memories of the Cathay crisis were

fresh in many players minds, and there were some indications that

this

scenario

might

just

play

out.

Some

settlement

problems occurred in the brokerage industry, and the ratio of bounced checks edged up to 0.4% of all checks written, a high point since the tense days of the mid-1980's. one

brokerage

house

hung

himself

by

a

The President of

curtain

cord

in

his

bedroom in response to insurmountable business problems 22 , and rumors of bank runs circulated, but were hard to pin down. Local

corporations

difficulties.

were

definitely

facing

financial

The Ministry of Economic Affairs estimated that

50% of all small and medium sized businesses on the island were in serious trouble, 23

and more than 300 firms in such labor

intensive businesses as textiles and footwear ceased operations between the market peak and late August. 24 Artek bounced regarded

Corporation,

checks

worth

footwear

a

medium

$800,000

exporter,

sized

electronics

early

October;

in

Inter

lack of short-term financing,

26

Classico

producer,

25

Group,

a

highly

failed

for

and such listed companies as

Taiwan Pineapple 27 and Tuntex 28 were rumored to be facing severe financial difficulties.

One local investment management company

predicted that ten listed companies would experience a financial 22

"Death of Security Firm Head Thought a Suicide," The China Post, October, 2, 1990.

23

Tseng, Osman, "More Firms Are Suffering Financial Troubles," Taiwan Business, September 10-16, 1990.

24

"Over 300 Labor Intensive Manufacturers Close," United Evening News, October 3, 1990.

25

Mark, Jeremy, "Taiwan Stocks Fail to Shake Losing Streak," The Asian Wall Street Journal, October 11, 1990.

26

"Failure to Get Timely Loan Folds Footwear Firm," The China Post, October 4, 1990.

27

"Taiwan Pineapple in Financial Trouble," The China Post, December 20, 1990.

28

"Tuntex Denies Financial Crisis," The China Post, September 6, 1990.

crisis in a fallout from the market crash after these companies were

reported

survival.

29

to

be

About

relying

20%

of

on

the

black

firms

market

listed

on

financing the

TSE

for were

reported to be losing money 30 , and many companies scrambled to drastically cut expenses.

Aurora Corporation planned to reduce

salary expenses by 30%, and Great Electronics drew up "a plan whereby

all

management

level

officials

are

required

'voluntarily reduce' their salaries from 10% to 50%." 31

to

Luxury

businesses continued to suffer dramatic drops in revenues; real estate prices were rumored to have dropped 30% - 40% on average, and over 80,000 imported automobiles were piled up on the docks in Keelung. 32 Six

well

heeled,

"second

generation

33

"

business

leaders

called for the Ministry of Finance to take action to rescue the market, and, ironically echoing the long-standing complaints of the foreign financial community in Taiwan, to enforce tighter quality

control

over

the

local

accounting

profession.

Such

senior business leaders as C.F. Koo, the powerful Chairman of the Chinese National Association of Chambers of Commerce and Industry,

called

for

government

intervention

to

prop

up

the

stock market and provide financing to local companies. 34 The signs were very ominous, but Taiwan proved to be too buoyant and adaptable for the disaster scenario to play very far out at the macro level.

The settlement problems abated without

29

"10 Firms to Suffer if Stock Crash Side-Effect Unremedied," The China Post, August 18, 1990.

30

"Over 1/5 of Taiex Firms in the Red," The China Post, September 6, 1990.

31

"Firms Lay Off Workers, Cut Salaries, Tighten Post Dated Checks as Weak ROC Economy Forces Belt Tightening," Economic Daily News, September 22, 1990.

32

"Imported Car Sales Down from Slow Economy and Stock Crash," The China Post, November 17, 1990.

33

Second generation businessmen are generally the sons of Taiwan's pioneer industrialists who have taken over their family firms or started new businesses on their own. They are generally U.S. educated at the graduate level and very sophisticated in their approaches to technology and international marketing.

34

"Almost No Business Immune to Economic Slump," The China Post, September 24, 1990.

doing much damage; the ratio of bounced checks remained under control, and there was generally no liquidity crisis in either banks or businesses. economic

machine

People got back to work, and Taiwan's

somehow

or

other

powered

through

a

market

crisis that would have poleaxed many other newly industrialized or developing economies. To

be

sure,

some

players

scenarios at the micro level.

did

face

their

own

disaster

One such unfortunate was my old

friend Driver Lu, nemesis of German shepherds.

One afternoon, I

heard a faint knocking, almost scratch-like, sound at my office door and looked up to see a haggard, deflated version of old Lu, who appeared to be about thirty pounds slimmer than the last time I had seen him lounging in a VIP room at one of the more sordid

brokerage

houses.

Instead

of

the

polyester

Hawaiian

shirt that had become his post-retirement trademark, Lu seemed to be dressed in an old bank driver's uniform, and there was definitely a shine on his Corfam boondockers. Lu, with an unaccustomed hangdog look, asked if he could come in for a moment, and I started to inquire about a trip he had taken to Las Vegas months before.

Lu's heart just wasn't in

the small talk, however, and he quickly changed the subject by matter of factly stating, "Boss, I lost all my money.

I need my

job back." I

suggested

that

he

really

meant

that

he

had

lost

a

considerable portion of his fortune in the market crash, but that

he

was

still

a

wealthy

man.

Lu

gave

me

a

exasperated look and said, "No, I lost all my money.

somewhat I had to

borrow cab fare to come see you today from my Tai-Tai." Driver Lu had bet big on the market and then doubled up his bets with underground margin loans after it started to drop.

During the market panic, he couldn't meet the margin calls from his

broker,

who

promptly

sold

Lu

out,

leaving

him

nothing.

Recognizing an obligation to Lu based on our years together on the mean streets of Taipei, I immediately put him back on the payroll and began to phase out my current driver, Smilin' Jack, who,

if

Lu

Pomeranian.

was

a

pit

bull

among

drivers,

was

a

personable

I suppose Driver Lu was lucky; he was able to put

his short, happy life in the fast lane behind him and to return to his natural habitat without being too much worse for the wear. Madam Boom Boom faced even more difficulties than Driver Lu.

I was just polishing off the last remnants of my omelet at

the American Club's Sunday brunch 35 , when I noticed Boom Boom at a corner table having an animated, high volume discussion in the Taiwanese dialect with three or four black clad, gold chained, and tattooed liumang who appeared to be having some sort of intra-mural cigarette smoking competition. had

probably

left

work

only

hours

Madam Boom Boom, who

before,

was

dressed

in

a

rather rumpled and revealing evening gown and peered through the nicotine clouds from behind dark glasses that doubtlessly hid very

bloodshot

contrast

to

eyes.

the

This

majority

of

tableau the

presented

club

an

members

interesting

who

were

in

attendance in wholesome family groups following morning church services. After the meeting rather noisily broke up, Madam Boom Boom lingered for another cup of coffee and probably her fiftieth cigarette during the past twenty-four hour period.

I sidled up

to pay my respects on my way back for another run through the

35

I happened to be a member of the Admissions Committee of the American Club and was in attendance when Madam Boom Boom's application for membership sailed through by unanimous vote.

buffet line, and Boom Boom's tale of gloom made Driver Lu seem like Pollyanna by comparison. She told me that the liumang

36

who had just left were

pressing her hard to repay margin loans but that her own cash flow

situation

entertainment

was

and,

far

from

therefore,

ideal

at

revenues

the at

time.

her

Business

nightclub

had

dropped off a cliff right along with the stock market, but her overhead remained very high.

She told me that she had no idea

how she would repay her underground lenders, but that there was actually one bright spot on the horizon if she could just hang on for a while longer. That bright spot was the supply side of Madam Boom Boom's business equation. cash

spinning

She told me that many of her most popular,

"assistant

managers"

had

gone

into

early

retirement with their stock winnings or had signed on as the concubines of market players, but they were now trooping back to work

with

somewhat

remuneration years

of

37

.

less

inflated

expectations

about

their

Madam Boom Boom, a primary school graduate with

supplemental

"hands

on"

experience,

was

basically

giving me a micro-economic analysis of supply and demand finding a new equilibrium point through the invisible hand of the price mechanism as it applied to her niche, nighttime business.

At

this new equilibrium, Madam Boom Boom hoped for the cash flow that could save her from the impatient and bad tempered liumang.

36

A liumang (流氓) is a small-time gangster.

37

See Lehner, Urban C., "Growth Costs Taiwan in Social Dislocations, as the Big Time Looms," The Asian Wall Street Journal, August 5, 1991. Lehner cites a nightclub hostess named Foong Foong who made tax free monthly income of between $8,000 and $75,000 during the bull market. She noted that she had turned down one offer of $18,500 to spend the night with a customer. Foong Foong was quoted saying, "The Taiwan attitude is: quick money is best, and if you make it, it doesn't matter how." An American friend interpreting for Lehner noted as an aside that the same logic had led him to a career in investment banking.

As it became clear that the disaster scenario would, in fact,

not

endured

generally

at

the

play

personal

out level

in

Taiwan,

by

Lu,

whatever

Madam

Boom

the

pain

Boom,

and

countless others, an alternative, more salutary scenario began to take shape in my mind, which I called the Rasputin model of the market.

The goodness of fit between this model and the

market's actual performance proved to be the salvation of Madam Boom Boom and many other players who were just able to hang on for a while without collapsing. Just to review for a moment, the Siberian monk Rasputin for various, complicated reasons was not very popular with certain segments

of

the

Russian

aristocracy.

To

remedy

this

unsustainable situation, the very unwholesome Prince Yussupov invited Rasputin over to his place in St. Petersburg, the Moika Palace,

one

evening

conversation.

A

for

a

little

thoughtful

host,

snack Yussupov

and had

some

light

taken

the

precaution of lacing the chocolate cakes and Madeira which he planned

to

serve

to

his

guest

with

approximately

enough

potassium cyanide to fell a herd of elephants. After wolfing down many of the cakes and pouring down glass after glass of the Madeira, however, Rasputin is said to have shown few signs of discomfort.

In frustration, Yussupov took

out his handy 7.65 millimeter Mossin-Nagant revolver and rather impolitely started pumping the monk full of lead at very short range.

These

shots

seemed

to

no

more

than

mildly

irritate

Rasputin, but he was put out enough that he decided to leave the palace under his own steam.

Outside the palace, Yussupov's

fellow conspirators proceeded to continue using the monk for rife practice, and, what with the wine and all, this finally began to slow him down a bit. rather

unpleasant

surgical

Finally, after performing some procedures

on

the

still-alive

Rasputin, Yussupov's pals carted him down to the Neva River where he finally succumbed in the icy water which soon froze over him. 38 It dawned on me that the Taiwan market, like Rasputin, was capable of absorbing unmerciful amounts of punishment and still coming back for more with the same level of animal spirits as before.

This model began to become clear to at least some

observers after the market finally hit rock bottom in early October and bounced strongly upward. TAIWAN STOCK EXCHANGE INDEX June, 1990 - May, 1991 7,000 6 ,3 0 5

4 ,9 2 6

TSE Index

5,000

3,000 2 ,5 6 0

4.0 $ 2 .7 b illio n $ 2 .1 b illio n 2.0 $ 7 9 5 m illio n

U.S. $ Billions

1,000

0.0 J un-90

Non-believers

in

A ug-90

Oc t-90

the

De c -90

Fe b-91

Rasputin

A pr-91

syndrome

erroneously

concluded that the market rally was nothing more than the "dead cat bounce" experienced in many markets after a collapse.

The

operative idea in this alternate model of the market is that, like a cat thrown off a tall building to the pavement many stories below, there will be a slight upward bounce following 38

Myles, Douglas, Rasputin: Satyr, Saint, or Satan, Mc Graw- Hill, 1990.

the protracted fall but that gravity will soon prevail once more.

Following this sequence of events, the condition of the

cat is, of course, not good. Rasputin-like, Taiwan's stock market shot back 92% from its low of 2560 to 4926 in a period of only six weeks and went on to close at 6305 the next May, up 146% from the trough.

Market

turnover rebounded in a similar manner from under $800 million on the average day in September to $2.1 billion per day in November and to $2.7 billion a day by the next April.

This

amazing rally after the speculative frenzy and total collapse that would have killed many equity markets for years to come was not an isolated instance. The Rasputin market again reared its head about a year and a

half

later

after

the

index

drifted

back

down

to

3098

January, 1993, only about 20% over its post-crash low.

in

Like

Rasputin ignoring the potassium cyanide and the 7.65 millimeter slugs, the TSE roared back 57% to 4851 in March with turnover likewise exploding by nearly a factor of ten from $315 million to just under $3.1 billion on an average trading day.

Taiwan Stock Exchange Index April, 1992 - March,1993 5500 4851

TSE Index

4807 4500

3500 3098 5 $3.1

4 3

$1.4

2 1

$0.3

$ Billions

2500

0 A pr-92

The

Rasputin

Jun-92

model

is

A ug-92

Oct-92

Dec-92

probably

Feb-93

useful

to

keep

in

mind

whenever one seriously evaluates the Taiwan stock market, and it should be assumed to be able to revive itself and figuratively crash back through the frozen ice of the Neva River at any point, not only undead but full of animal vigor and ready to go. This Rasputin syndrome bailed out most market players who had more than an ounce of staying power, including Madam Boom Boom, who was able to pay off her underground lenders and get back to her core business of providing emotional support and physical comfort to local gentlemen facing their mid-life crises. We can describe the market by using the Rasputin analogy, but trying to understand why the market did not flip into the disaster

scenario

is

another

matter,

and

explanations

necessarily tentative and subject to conjecture.

are

Nevertheless,

we can take a stab at it, as follows. First,

the

market

remained

extraordinarily

throughout the crash and the Rasputin phase.

liquid

Although trading

turnover, the dollar value of shares changing hands, declined along with the index, this is only an arithmetical certainty. Trading volume, the number of shares traded rather than their dollar

value,

remained

at

extraordinarily

high

levels,

indicating that there were matching buyers for the legions of panic sellers.

As shown in the chart below, trading volume

actually reached new highs just after the crash, at a time when stock market turnover was still in the doldrums.

During the

first quarter of 1990, the TSE executed total trades of 60.2 billion shares, five times the New York level and nearly double Japan's

total

trading.

39

During

this

period

of

market

instability, market players could readily sell their shares to raise

needed

individuals

cash.

The

remained

banks,

relatively

corporations,

liquid,

and

the

and

country's

monetary policy remained on course and firmly under control.

Taiwan Stock Exchange Volume January, 1987 - December, 1990

1,516 $1,500 1,271 Millions

Average Daily Trading Volume

$2,000

1,000 $1,000 678 $500 344

414

$0 Jan-87 Jul-87 Jan-88 Jul-88 Jan-89 Jul-89 Jan-90 Jul-90 Jan-91

39

"Taiex Trade Volume Highest in the World," The China Post, April 30, 1990.

many

During the crucial period of the crash and the market's immediate recovery, daily stock trading was subject to only the relatively

loose

and

liquidity

enhancing

plus

or

minus

7%

trading limits, rather than the narrower, liquidity restricting, limits in place at other times.

We will take a more thorough

look at this topic in the next chapter. The

second

factor

which

led

to

the

validation

of

the

Rasputin model rather than the disaster scenario was the overall strength of Taiwan's export led economy.

As shown in the chart

below, growth in gross national product did slow down during the market crash, but it remained at levels that would be considered booming conditions elsewhere in the world and then bounced back rapidly to even higher, more typical growth rates. production,

exports,

and

the

international

value

Industrial of

the

New

Taiwan dollar remained relatively strong and recovered quickly from small absolute declines; interest rates were stable, and inflation remained low and well under control throughout the period.

The strength and diversification of the Taiwan's real

economy prevailed over the money games in the stock market, and the country's economic development kept right on moving with only minimal interruption.

Taiwan Gross National Product 1988 - 1991 12%

Growth Rate in GNP

10% 8 .8 %

8 .4 %

8% 6 .6 % 6% 3.6 %

4% 2% 0% 1Q- 88

3Q-88

1Q-89

3Q-89

1Q-90

3Q-90

1Q-91

3Q-91

Sourc e : B aring Se c uritie s, "Taiwan M onthly Re port", Se pte m be r, 1992.

A related third reason for the Rasputin market rather than the disaster scenario was the emergence of the mainland Chinese market for Taiwan's exports and investment.

Trade with the

mainland had been quietly going on for years with transshipments made through Hong Kong to circumvent to official ban on direct trade.

By the time the stock market

started to crater in early

1991, the China market had become one of Taiwan's most important export customers, supplementing what had been an overreliance on the American market.

Taiwan Exports to Mainland China 1985 - 1991 $ 6.0

$ 4 .0

$ 4.0

$ 3 .5

$ Billions

Taiwan Exports to China

$ 5 .0

$ 2 .7

$ 2.0

$ 1.5 $ 1.1

$ 0 .9

$ 0.0 1985

1986

1987

1988

1989

1990

1991

Taiwan long-standing but quietly conducted trade with the mainland through Hong Kong finally came out of the closet and became

the

"story"

for

local

and

international

brokers

to

attach to many prominent Taiwan companies, which then promptly became "China plays."

While much of this was merely the slick

marketing, there is a certain logic to successful, world class companies from Taiwan having a competitive advantage in dealing profitably with their cousins on the mainland.

Taiwan Exports 1985 and 1991 120%

100%

16 .3 %

8 .3 %

United States

2 2 .6 % 80%

2 4 .0 %

Japan Europe

8 .3 %

60%

All Other

18 .4 %

11.3 %

China

4 8 .1%

40%

12 .0 % 2 9 .3 % 20%

0%

1985

The

fourth,

contributed

to

and

1991

perhaps

avoiding

support for the system.

a

most

important,

financial

meltdown

factor was

which

government

During the market's precipitous fall

government officials quietly took steps to increase the demand side of the equation by taking such actions as loosening rules governing foreign access of the market, allowing new investment management companies to form, approving the launch of new funds by the existing money managers, allowing pension funds to invest in a higher percentage of their assets in equity instruments, encouraging government controlled banks to buy shares, allowing the

formation

of

new,

legal

margin

changes to the stock transaction tax. formed

a

$1.2

billion

"Economic

lenders, 40

and

discussing

The government also

Revitalization

Action

Group"

under the Ministry of Economic Affairs to funnel loans to cash strapped companies and to prevent the stock market crisis from 40

"Finance Ministry to Bail Out Market," The China Post, September 22, 1990.

becoming

a

responses

general have

liquidity

become

crisis.

standard

Variations

operating

on

procedure

these during

periods of stock market stress. During

the

rout,

some

senior

government

officials

stuck

their necks out to "talk up" the rapidly collapsing market. Incoming Finance Minister Wang Chien-shien commented in early July with the TSE index still hovering near the 5,000 level that " the reasonable level for the index should be between 5000 and 7,000

points,

fluctuations explained

of

that

and

the

the he

government

index

in

believed

will

this

that

move

range."

this

range

to

maintain

Minister

Wang

represented

a

"reasonable" level for the market since the index had been at 5,000 when his predecessor Shirley Kuo had taken office, and it had been at 7,000 when she left office. 41 A few days later, Wang went on to bullishly proclaim to Chen Shui-bian, a member of the Legislative Yuan, "If I were not Finance Minister, I would step in to purchase blue chips right now as a long term investment.

I guarantee that you will profit

If you lose, I will compensate you. 42 "

from the investment.

Led

by the blue chips, the market soared 300 points the following day.

The rally was short lived, however, and Minister Wang was

quick to note that his guarantee only applied to Mr. Chen and that he only took responsibility for this advice within the Legislative Chamber. 43 In past market crises, government officials were willing to directly cooperate with the "big hands" to restore confidence in the stock market.

During the depths of the 1988 crash, for

41

"Gov't Plans Measures to Stabilize Bourse," The China Post, July 2, 1990.

42

"Wang's Comments Push Market Up 300 Points," The China Post, July 11, 1990. Minister Wang actually said, "如果我是老 百姓，我會大量買進。 買進績優股，長期持有，保證賺錢，虧了我賠。 “ according to the local press. See article noted below.

43

邱文信，“長期投資穩賺﹕官話說的太滿”，工商時報，1990年7月12日。 

example, Premier Yu Guo-hua directed TSE President Chiao Hsiaofeng to lead official market rescue efforts. efforts

Chiao

invited

seven

notorious

As a part of these

"big

hands,"

including

"Chili-Pepper" Chiu, "Thunderclap" Lei, and Ahbula, to one of the restaurants at the Lai Lai Hotel to talk things over.

This

meeting received extensive media attention and boosted market confidence, and the index shot up more than 2000 points in a little over a month. 44 A

final,

and

perhaps

sobering,

possibility

is

that

the

market crash and related financial disturbances did do serious and lasting damage to the economy, but that it would simply take time for these effects to work their way through the system. Maybe Rasputin really was dead long before he hit the icy river, and

his

convulsive

movements

were

merely

caused

by

nerve impulses crossing hopelessly damaged synapses.

misfired

There have

been signs which lend some support to this second alternative hypothesis, but they have been mostly overshadowed by continuing industrial

upgrading,

personal

income

gains,

and

general

economic upgrading. Now, having examined the inflation and subsequent bursting of the great Taiwan bubble, it's time to take a closer look at the mechanics of the market and how the players use the markets peculiarities to ply their trade.

44

"'七大天王力挽股市狂瀾，財訊月刊，1988年12月。