Tough times in mainland stock market following precedent in Taiwan

For someone who has been following the Asian economic and financial markets for a long time, the recent market crashes in China evoke a sense of déjà vu.

The Chinese stock market today seems a replica of its Taiwanese counterpart two decades ago. Taiwan had been growing at the rate of 7-8 per cent in gross domestic product at the time, pretty close to the mainland's growth rate now.

Common to both are the high proportion of retail investors, the widespread use of non-bank financing, and the rush into the stock market. The recent coverage of the Chinese rout could have been straight out of the Taiwanese newspapers of the '80s and '90s.

Fortunes were made and lost in a matter of days, and share prices defied gravity and fundamentals. For instance, during one of those years, one Taipei bank sold at a price-to-earnings ratio of 358. On some days, trading on the Taiwanese stock exchange exceeded the combined trading volume of the Tokyo and New York stock exchanges, according to a book on the Taiwanese bubble.

And just as the central government moved to intervene in the stock market, the Taiwanese government used various means to soothe the nerves of investors, including by encouraging government pension funds to buy certain blue-chip shares, something quite unheard of in the developed markets.

Yet, in the long run, what helped the Taiwanese stock market become more stable were not the daily government interventions but the work done by authorities in creating the right conditions for a healthier development of the capital markets. One of the most successful schemes was Taipei's "gradualist" approach of deregulating the financial markets using its widely admired Qualified Foreign Institutional Investor scheme - just as China did decades later. The decision led to more foreigners owning shares, albeit at a measured pace.