S5-E8 - Taiwan’s Stock Market Bubble – And the Crash of 1990

THE TAIWAN HISTORY PODCAST – FORMOSA FILES

TRANSCRIPT

S5-E8 – TAIWAN’S 1980s STOCK MARKET BUBBLE – and 1990 crash

Release Date: April 10^th, 2025

Time: 27:43

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Today we're going back to the crazy days of 1990, February 10th, 1990 to be exact. That day was Lantern Festival, which marks the end of the Lunar New Year period, the 15th day of the lunar month, although it's not a holiday. So, on that day, February 10th, 1990, the Taiwan Stock Exchange, known as the TAIX, so the index for the stock exchange was at a peak of roughly 12,500.

Eight months later, it had fallen to a low of 2,500. This was a collapse of 80%, one of the worst stock market crashes of all time. Today on Formosa Files, we're looking at the great stock market bubble of the late 1980s and that crash in 1990. So travel back with us to a crazy time when Taiwan, the Republic of China, earned the nickname, the Republic of Casino. 

The Taiwan History Podcast, Formosa Files, is made possible through the generous sponsorship of the Frank C. Chen Foundation.

So as long as there's been money and investment, I guess there's been speculative investing. Speculative investing is high risk, high reward approach to investing, right? Investors buy assets and they expect significant price increases based on market trends rather than fundamental value. People see others making easy money and they want to join the fun, but things often end in tears.

John, you know the tulip mania, yeah? Yes, tulip mania. That was in the Netherlands in the 1630s. That was the same time as the Dutch East India Company were settled here in southwestern Taiwan.

Back in the motherland, there was speculative trading in tulip bulbs. Tulips, those beautiful flowers associated with Holland, they became highly fashionable and the prices kept getting higher and higher. In modern terms, a tulip bulb could be worth hundreds of thousands of dollars.

Of course, this was unsustainable and the market suddenly collapsed. Yeah, like maybe when the flower died. It's hilarious to think about, but it's absolutely correct.

They were insane about tulips. This tulip mania was limited to a relatively small number of investors and no serious lasting damage to the Dutch economy. Certainly, other crashes have had more terrible consequences.

The Wall Street crash of 1929 ushered in the Great Depression and provided fuel for fascism in Germany, Italy, and Japan. Thankfully, Taiwan would quickly recover from its 1990 stock market crash, which is one of the reasons it's such a little-known episode today. Okay, but before we look at that crash, we need to examine the rise.

The stock market took off in 1986. Yeah, but we need to go back before then. The seeds were in some ways planted by lottery gambling in the preceding years.

Lotteries, the cash strapped KMT or the nationalist government having just relocated from China. They needed money really badly, and in 1950, they launched the patriotic lottery program. You could be patriotic and have a chance to become rich.

In the early years, the lotteries actually had pretty patriotic slogans such as, down with the Chinese communists, resist the USSR, retake the mainland, and eradicate the communist bandits. Fast forward to the summer of 1985, an illegal lottery was launched. It was called Dajia Le, literally everyone happy.

This illegal lottery piggybacked on the patriotic lottery. By piggyback, you mean it used winning numbers from the state-controlled patriotic eradicate the “communist bandits” lottery? Yes, it used some of the numbers, so it didn't have to have its own drawing of numbers. And compared to the government's lottery, this Dajia Le lottery offered larger prizes and a higher chance of winning.

It spread like wildfire and was incredibly popular. The country was in the grip of lottery fever, so much so that the authorities were worried about its economic and societal impacts. Yeah, I'll give you an example of the insanity.

The teenage son of the patriotic lottery's director was kidnapped by some gambler criminals. Okay, you know, these things happen. Guess what the ransom was? The ransom? I don't know.

A hundred million NT? No, the ransom wasn't money. It was the winning numbers for the upcoming lottery. Incredible.

If you think that's crazy, here's a similar story. The artist who illustrated the state-sponsored patriotic lottery tickets, Lin Xingxiong, was kidnapped by gamblers. These geniuses thought he must have some inside knowledge of the winning numbers.

I know you're the artist. The artist could provide winning numbers for them? Oh, good lord, the sheer stupidity. Yeah, well, okay, to paraphrase that famous line about insanity, well, stupidity is doing the same thing over and over and over and expecting different results.

Because believe it or not, the artist was, over the next 18 months, kidnapped a further two times. I wonder if he gave up the numbers on the second time or the third time. Yeah, yeah, yeah, I wonder.

Okay, uh, these are extreme cases, but the Dajialu lottery was causing widespread problems, and at the end of 1987, the government ended the state-sponsored patriotic lottery. Which, in effect, brought the underground Dajialu lottery to an end as well, because as you'll recall, it used winning numbers from the state lottery. So, where could investors and gamblers get their fix, their gambling high? Well, there were still underground Hong Kong lotteries.

Meh, and the usual mahjong, baseball, whatever thing you could possibly bet on, pigeons, beetles, et cetera, et cetera. Oh, and the stock market. Taiwan's stock exchange was established in 1961, began trading in 62, and it was a relatively low-key stock exchange, up until the mid-1980s, that is.

Yes. So, before that, Taiwan's financial system had been pretty conservative. Taiwan's forced out of the UN in 1971.

Countries are switching recognition. The threat of China is there as ever. There's the exit from both the IMF and the World Bank.

Taiwan felt it needed to be resilient, not risk things. The government kept a tight control of banking, and at the time, the new Taiwan dollar was tied to the US dollar. There were some funny comments from 1980 when emerging market investor Mark Faber visited Taiwan.

He described the Taiwanese stock market as being quiet and half-dead. He visited the island's largest brokerage and noted that the employees seemed shocked by the fact that a foreigner was visiting. Quiet and half-dead is not how you want your business described.

But in the late 1980s, things become very different. Years of booming exports and high rates of savings meant there was a lot of money looking for a home. So, banks at the time had low interest, and the Dajia Le lottery was about disappearing.

The financial market was opening up. It was deregulating. The stage was set for one of the most amazing stock market bubbles of all time.

Taiwan's sleepy, half-dead stock exchange became not sleepy. Highly caffeinated. This highly caffeinated market took off in 1986 when the TAIX index hit 1000.

That was after 24 years since its start in 62. In only two years and eight months, the index rose tenfold, breaking the 10,000 mark on June 19, 1989. Over a three-year period, the TAIX, or the Taiwan Stock Market Index, increased 12-fold, 12 times higher.

And at times, the volume on the exchange in Taiwan exceeded that of Tokyo and New York. There's actually a book on this crazy time. It's called The Great Taiwan Bubble, The Rise and Fall of an Emerging Stock Market.

It was published in 1997. It's written by Steve R. Champion, an American banker. He was here in the banking investment sector.

He rose to be CEO of Taiwan's largest fund manager. So, he had a front row seat and the ability to analyze what was going on. One of the incredible things about Taiwan's stock market boom was the volume of transactions.

Investors didn't just sit on stocks. They're watching every rise and fall, selling and buying, buying and selling. Yeah.

To quote from the book, in the TAIX, a long-term investment is three hours. And yeah, there were only 188 companies listed, but the market still reached incredible volumes, like you just said, near New York exchange level volumes. The huge transaction volume gave an opening for brokerages, people who take your money and invest it for you or lose it for you, depending on the case.

So, the number of these people taking your money and investing it, these brokerages exploded. And explode is not part of your fondness for high-energy wording, is it? Okay, no. Yeah.

Well, you be the judge. The number of licensed brokerages went from 27 to 297 in less than two years. Now, is that an explosion? Okay, all right, it exploded.

And that's not even looking at underground investment houses. So, this explosion of stockbrokers created a problem. Where do you find qualified staff? I mean, you don't really have time for proper training.

So, you've got tens of thousands of people in the industry who were basically cowboys, right? And to quote from Champion's book, one new brokerage in Taichung bragged that its recently hired president had many years of experience at a well-established brokerage in Taipei. A quick call to his former employer revealed, however, that this new CEO had served as a janitor in his previous position. Okay, but to be fair, recent studies have shown that monkeys throwing darts at a dartboard, picking stocks are relatively comparable to, yeah.

So, he might've done really well. And, you know, you couldn't be too picky at that time because these investment houses had a tsunami of customers. So, you don't want their help or somebody else will take it.

An estimated 3 million people were actively engaged in stock market investment. This represented one third of Taiwan's labor force of 8.3 million people. Remember, John, just people sitting around everywhere, staring at the TV, the red and the green.

Yeah, yeah, incredible. A third of the population, and among them, many politicians and journalists. Yeah, so journalists were writing about companies they had an interest in, which from my training, let's just say, is not entirely ethical.

Luckily, we both have absolutely no conflict of interest when it comes to anything financial. Yeah, yeah, moving on. So, investment became a national obsession.

It continues to today, but back then, wow. Hundreds of thousands of investors visit the brokerages in the morning, watch the television screen, and then they'd place their bets. I mean, investments.

So, today we use our mobile phone apps, right? But they used to have to go there. And transactions were so intense that the stock market would typically hit the daily price fluctuation limit by the end of the morning, maybe mid-morning. So, investors would say, oh, okay, I've done my day's work.

I'll go have lunch and enjoy myself. Yeah, if they didn't have a day job. Which was the case for some, with many people quitting their jobs.

I mean, why work if you can make easy money? The author of the book I mentioned, The Great Taiwan Bubble, he had a company driver, a Mr. Liu, and he's a reoccurring character in the book. So, a company driver, a Mr. Liu, a recurring character. This guy quit his job? Yeah, but it was after he inherited some money.

However, feeling a little bored, he got into investing in a big way and was happily riding the climbing stock levels. The author ran into him a little bit before the market hit its peak, and he was doing well. Mr. Liu says, quote, The market is like magic.

I've been to the States and Europe over the last few months. I just bought the wife a diamond-encrusted Rolex, and I'm buying a small place in LA for my son to stay while he studies there. Living the good life there, are you, Mr. Liu? Derek, are you familiar with the term nouveau riche? Nouveau riche, sure.

Comes from French for new rich. It refers to people who have recently acquired wealth rather than inheriting it. But when people say new rich, it's not necessarily like a compliment.

It has a negative connotation because it implies that the newly wealthy lack the refinement, the cultural sophistication associated with old money. And I know where you're going with this. Yeah, there were a lot of these nouveau riche around, these newly rich.

Newly rich from gambling, from real estate, and especially the stock market boom. And let's just say some of them had more money than class. They flaunted their wealth.

It was incredible. Yes. Rolex watches.

I knew a guy had one on each arm. Why not, you know? Fur coats. Yes, fur coats in subtropical Taiwan.

And luxury cars. Yes. For example, so many Mercedes-Benzes were bought that for a time, Taiwan was the second largest market in the world for these Mercs.

Amazing. There were high-end restaurants selling delicacies. Sometimes exotic wildlife.

Tiger private parts. Bear paws and other horrors. Speaking of animals, this was the time of expensive exotic pets.

Yeah, like orangutans. Seriously. And more commonly, the Asian arowana, Hong Long Yu, red dragonfish.

That fish is darn expensive and it showed that you'd made money and you'd put it right in front of the office as you walk in and see this massive fish there. Also, it's a bonus because it's lucky. It's just going to help you make more money.

Well, double winner there, Eric. And nightclubs flourished. So, in this book, The Great Taiwan Bubble, the author describes a couple of colorful characters.

And yeah, among them, a nightclub owner and stock market player called Madam Boom Boom. Madam Boom Boom. A nickname.

Yeah, no kidding. Her nightclub was very famous at that time. It featured beautiful, quote unquote, management trainees.

And it was popular with some of the big rollers, the big investors. And they were a generous crowd to celebrate the reopening of an expanded and redecorated nightclub. One of her broker customers in attendance at this opening, quote, Cavalierly ordered 100 bottles of XO brandy to be sent to the tables or private rooms, end quote.

And each bottle cost 320 U.S. dollars. Wow. All this easy money and conspicuous display of wealth.

It was a magnet for criminals, of course. You've got this high flyer or showy broker running an investment company and the kidnappers and extortionists say, hey, gazelle on the Serengeti. Yeah, apparently bulletproof vests became a favorite accessory among the brokerage crowd and were the bestselling item at Taipei's 1989 Fashion Week exhibition.

That's wonderful. International investors expressed concern about the market's overvaluation. In 1989, that guy you mentioned, Mark Faber, that emerging markets investor who described Taiwan's stock market as sleepy back in 1980.

So, this guy, he writes to his clients and he says, quote, we feel that the Taiwan market is currently significantly overpriced. In many ways, the Taiwan boom is comparable to the South Sea bubble. What event will trigger the decline? We do not know.

But at the current level of valuation, the margin for error has become extremely thin. So put that into simpler words, this is not worth as much as they think it is. And it's going to up.

So international investors start getting worried. And so does the Taiwanese government. They're worried about a coming crash, but also the moral impact of all the gambling, the increase in related crimes.

There was a sharp increase in the number of murders, robberies, kidnappings. Also, a labor shortage because of people leaving jobs to become investors. And for those workers still on the job, productivity was slowed because of the market.

They were distracted and they're disgruntled at earning money the hard way. So, the government took action, tried to cool things down. It was July of 1988 when President Lee Teng-hui appointed Shirley Guo as minister of finance, who announced a tax on security gains to begin January of the following year.

The TAICs crashed, dropping for 19 consecutive days. The TAICs dropped a total of 36 percent. Investors protested and besieged the Ministry of Finance and Guo's residence.

And legislators took the investor's side, holding the government accountable. I guess they had some stocks themselves. And also, they had an eye on the next election.

The government canceled the tax. Stock prices surged back, made up the loss, and they kept going higher. And on June 19th, 1989, two weeks after the Tiananmen Square crackdown in Beijing, the TAICs broke 10,000 points.

Okay, so just to recap, the TAICs had broken a thousand points in 1986. Part of the investment mania and the investment bubble of those years involved property prices. Housing went crazy, especially in Taipei.

There had been decades of urbanization, you know, people moving to the city, population growth. People were richer in the 1980s, but housing prices were out of control. Okay, it's always fun to take a look at a specific case.

So, we've got one here, an elementary school teacher, 37-year-old Li Xinjiang. He taught in Xinpu Elementary School in Banqiao. In 1988, he sold his house because he wanted to do a master's degree.

He needed the money. He was about to become a father. So, he sells his house for 1.6 million NT.

Okay, six months later, his same house is on the market for 3 million NT dollars. Almost double in six months. Which is insane.

So, this teacher goes, I can't even afford a much smaller apartment with the money I got originally. So, in early 1989, he holds a press conference with friends and other teachers to express outrage at the housing situation. He hadn't planned to take things further, but there was just such a huge supportive response that he ended up starting and spearheading a new movement.

In May of 1989, with colleagues from school and friends, he formed the Homeless Help Association. But it was his phrase in Chinese translated in English to snails without shells. That would really become the name of this movement.

There were protests, really big protests, some of the most notable since the lifting of martial law. These protests were nonviolent, nonpolitical, and tidy. People picked up trash.

These were, after all, largely middle-class people. The most dramatic protest was a sleep-in on August 26, 1989. 550,000 snails without shells supporters slept.

Oh, that's a lot of S's. Snails without shells supporters slept. They slept out on ZhongXiao East Road, one of Taiwan's priciest areas.

They literally slept on the road, shutting the area down. It wasn't confined to Taipei. There was a sleep-in at what's today Taichung Park, and I think groups in today's New Taipei City also did a few lie-ins.

I don't keep an eye on the property market area, but alas, the situation isn't any better today. But there was some temporary relief after the crash of the stock market in 1990. Yeah, we can get back to how things are today.

But just as an example for you, John, Kaohsiung has broken the 10 million NT mark as an average. That's a lot of money. Yes.

And if you want one of these ones that are newly constructed, it's going to be somewhere closer to 20, 25 million. Yes. So, today's younger generation are not angry.

They just shrug their shoulders and give up, yeah? Yeah, it's impossible. So back to this crash in 1990, just after Lunar New Year, Chinese New Year. So, to recap from February, the TAIC sank to a low of 2,500 points in October.

So that's an 80% drop in just eight months. John, there were multiple reasons for this, yeah? Multiple reasons. The triggers included Japan's stock market going down, bankruptcy of investment companies, the Gulf War that increased oil prices, and just the crazy overvaluation.

It was like that tulip mania back in 1630s Netherlands. So, the crash was a devastating drop. It might have broken other countries, left a decade or two of damage.

But as it turned out, Taiwan soldiered on. The money which people had invested in stocks and real estate had come from investors' own money, people's personal savings. So, businesses weren't too badly affected.

Factories kept producing. There was no mass wave of bankruptcies, unemployment, soup kitchens, none of that kind of stuff. Yes, at the macroeconomic level, things might have worked out, but there was a lot of personal heartbreak.

Lost life savings, lost houses. There was poverty. There was divorce, depression.

On the bright side, companies found it easier to get workers. Many returned to their jobs. Now they needed money, so they went back to the factory or the shop or the restaurant.

Yes, and sailors returned to Evergreen Marine, including one ship captain who returned after having run through his entire life savings. Lots of stories like that. Yes, certain businesses suffered.

The demand for luxury goods dropped. Mercedes-Benz saw a 70% sales drop compared to the previous year. Here's a quote, 50,000 unsold cars sat on dealer lots, and another 60,000 piled up in the Geelong Customs warehouse.

Real estate speculators slashed prices by 40% more on luxury flats they had just purchased months before. Imagine 60,000 cars at a port. I can't even picture it.

Not surprisingly, there was an increase in mental health problems at this time. Stress, depression. I forget the numbers, but a big increase in the number of psychiatric patients.

I think it was actually up something like 75% compared to the year before. Like a huge, huge margin. So, this fall in the TAIX from its February peak was not a straight downward line.

The index fluctuated, kind of two steps down, one step up. In late May, there was a rally, which went into June. The index climbed back up to around 7,800 plus.

The optimists were... Optimistic? Optimistic. Yeah. We're like a married couple, can finish each other's... Sandwiches.

Sandwiches. Okay. The market is fighting back.

It's going up. And then on June 4th, 1990, June 4th, so exactly a year after Tiananmen, the market in Taiwan collapsed. It dropped 6.5% during a three-hour session and then experienced more disaster during the following days.

There was a 24% drop that week. So that means more pain for businesses and individuals. More cars piled up in Geelong.

Actually, I'm not joking. It's up to 80,000 from your 60,000. And people going back to work.

One of these returnees was the author's old driver. A certain Mr. Liu with a fondness for Rolexes. Diamond encrusted.

One day he pays a visit to the author at his office. And this Mr. Liu has a ragged, deflated look about him. He seems to have lost about 30 pounds.

And gone is his Hawaiian shirt. He's back in his driver uniform. And he says, boss, I lost all my money.

I need my job back. Campion, the author, he figures that by all his money, he means a lot of money. But that's not the case.

His former driver explains. No, I lost all my money. I had to borrow a cab fare from my wife to come see you today.

Thankfully, he was hired back on as a driver. A happy ending for us. That's nice.

And a happy ending for Taiwan's economy, too. The miracle economy kept marching on. Taiwan's gross domestic product that year of 1990 grew by 5.5%. Sure, a slowdown compared to the previous year's growth rate of 8.7. But not bad.

The following year, it was 8.4. We would kill for that today. Absolutely. Very impressive.

The recovery of the Thai X would take longer, though. It was only in the summer of 2020 that the index surpassed its 1990 high. That's 30 years.

Yeah. But since then, it's really soared. Over 20,000.

Yes. Yes. Okay.

What was the last drop? The last drop? Well, I just checked before we recorded. This morning, it's dropped about 9.5%. Yeah, you see that? That's a lot. Yeah, historic.

We're recording this on a historic day of trading. Yeah. All right.

Thanks for listening to this number-filled Formosa Files episode. And some unsolicited advice. You're going to play on the stock market, do so smartly. Wisely. With caution.

Good luck with your investments and your romances. 

Thank you for that, John. 

I'm John Ross.

I'm Eryk Michael Smith. Bye.