Taiwan's stock crash deepens as traders unwind leveraged bets

The Taiex fell as much as 3.4 per cent on May 13. PHOTO: AFP

TAIPEI (BLOOMBERG) - Taiwan stocks sank for a third day in volatile trading on Thursday (May 13), extending a rout that's triggered the fastest liquidation of leveraged positions since 2018.

The Taiex was down 1.5 per cent at 10.04am local time after dropping as much as 3.4 per cent and gaining 0.3 per cent. For the three days it's lost 9 per cent. Declines pared after Apple Daily reported that the government sees a lower chance of raising the Covid-19 alert level.

Forced selling has compounded this week's losses, with the level of margin debt falling by a net NT$12.9 billion (S$615 million) on Wednesday, according to exchange data compiled by Bloomberg. That takes the two-day drop in leverage to NT$25.6 billion, showing traders faced margin calls by brokers to cover losses in their stock accounts.

The worry is that falling share prices will trigger a continuous downward spiral in Taiwan equities, adding to a long list of challenges facing investors in the US$1.9 trillion (S$2.5 trillion) market. The value of margin debt in surged 46 per cent this year to about NT$274 billion at its peak at the end of April, the highest since 2011. By comparison, the Taiwan benchmark was up 19 per cent in that period, an indication that people were taking out loans faster than stocks were appreciating.

The sharp reversal in Taiwan stocks is a warning to highly leveraged investors around the world. The Taiex was the world's best performing equity gauge in the three years through April, surging almost 80 per cent in U.S. dollar terms, as a seemingly never-ending rally in tech shares pulled in retail investors. It's now suffering the biggest drop globally.

Taiwan's National Stabilization Fund Committee may hold a meeting soon to respond to the rout, finance minister Su Jain-rong said at a meeting of the legislature's Finance Committee on Wednesday, according to the Taipei Times. The fund last year pledged to back the stock market with as much as NT$500 billion as stocks crashed globally in March, while the Financial Supervisory Commission tightened rules on short selling.

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