Talk of Attack by China Jolts Taiwan Stocks

Taiwan’s stocks took their biggest tumble in 3 1/2 years Friday, as rumors of military preparations by China raised the specter of a protracted standoff between the rival governments.

Nearly three-quarters of the shares traded on the Taiwan Stock Exchange sank by the maximum allowable 7%, pushing the benchmark index down 6.4%, its steepest decline since Jan. 5, 1996. The 506.46-point loss was the eighth-largest ever.

The benchmark index fell 13.3% this week.

Friday’s rout was sparked by unconfirmed reports in two Hong Kong newspapers that China was preparing some form of military action, after Taiwanese President Lee Teng-hui provoked Beijing last weekend by characterizing relations with China as “state-to-state.” While Taiwan believes that formula puts the two on a more or less equal footing, China interpreted it as a virtual claim to independence by an island it regards as an inalienable part of the nation.

“Sentiment is very vulnerable now,” said Yeh Chingju, a fund manager at TCW Asia Ltd. in Hong Kong. “You can see today, there was a lot of panic selling.”

The Nationalist party, or Kuomintang, controlled most of China until the 1940s, when it lost a civil war with the Communist Party and retreated to Taiwan. Since then, the rival governments have exchanged occasional missiles and frequent invective.

About halfway through Taiwan’s three-hour stock trading session Friday, news of what two Hong Kong newspapers were reporting came across local wire services, turning what had been a positive day into a rout, traders said.

Hong Kong’s Sing Tao Daily reported, without citing sources, that China may launch missile attacks without warning and could blockade Kaohsiung and Keelung, the island’s two largest ports.

The paper also said Fujian Province, directly across the straits from Taiwan, was declared a no-fly zone from 9:30 a.m. to 6:30 p.m. Thursday, disrupting flight schedules out of Hong Kong, so that troop movements could take place with less scrutiny.

Hong Kong’s Sun newspaper also reported that Chinese President Jiang Zemin signed an executive order placing China’s army on a level 2 alert, indicating a higher level of preparedness, while Taiwan similarly raised alert levels and carried out anti-missile defense system tests.

Taiwan Finance Minister Paul Chiu told reporters the rumors were untrue. “We have checked with the Ministry of National Defense and they have found no unusual military movements” in China, he said after the market closed.

Chiu was less categorical when discussing the Taiwan government’s provisions for supporting the stock market. Thursday, he spoke of a $31-billion market support fund to be amassed this year, and earlier in the week he said money was already available through various state pension funds and deposit systems.

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New Trouble for Asia

Taiwan’s stock market plunged this week as tensions between Taiwan and China escalated. The worries also hit the Hong Kong and Japanese markets Friday. Taiwan’s main stock index, monthly closes and latest:

Friday: 7,411.58

Source: Bloomberg News