Republic of Casino: A Tale of Greed, Gambles, and Collapse in Taiwan

(Note: This is an excerpt from my upcoming book on the History of Financial Booms and Busts)

The speculative stock market frenzy that engulfed Taiwan in the late 1980s remains one of history’s most spectacular financial bubbles.

Yet, I bet only 1 in 1000 investors know about it.

In 1980, emerging market investor Marc Faber described the Taiwanese stock market as sleepy and isolated:

“[Taiwan is] a moribund and illiquid market which was locally and internationally ignored in favor of the then-fashionable hard asset plays like gold and silver. Visiting the island's largest brokerage, he described the company's employees as shocked by the unprecedented event of a foreigner's visit.”

In 1985 - at an early stage of the bubble - the Taiwan Stock Index (Taiex) -was trading around the 700-mark. 

The wild market climb started in 1986 when Taiwan Stock Exchange Index (Taiex) price index first hit 1,000.

In only two years and eight months, the index soared tenfold.

It broke through the 10,000 mark on June 19, 1989, when the index closed at 10,013.

Over just four years, the Taiex had rocketed up an astonishing 1200%, as speculative fever infected the island nation of 20 million people. 

Source: Asian Century Stocks

The Roots of Taiwan’s Bubble

The roots of Taiwan’s bubble emerged in the mid-1980s.

After losing the Chinese civil war in 1949, the Nationalists led by Chiang Kai-Shek evacuated to Taiwan. Taiwan then became the base of the new "Republic of China" (Taiwan), with a government run by Chiang Kai-shek's Kuomintang Party. Savvy government policies allowed Taiwan to emerge as an export powerhouse.

By the mid-1980s, Taiwan’s foreign exchange reserves were only slightly smaller than Japan’s - a country with five times the population. This helped secure its financial independence from mainland China, which had always viewed Taiwan as a rogue state.

Land reform and export promotion had combined to make Taiwan one of the four original “Asian Tiger” economies, alongside Singapore, Hong Kong, and South Korea.

 Soon, hot money began pouring into Taiwan. Financial deregulation and capital inflows in the mid-1980s had lit a match. Interest rates plunged as foreign banks entered Taiwan.

When interest rates plunged, locals moved savings into the sleepy stock market to earn positive returns.

An illegal lottery called “Dajia Le” (大家樂) was launched in 1985. It spread like wildfire through the nation, especially in Central and Southern Taiwan. For as little as 300 or 500 Taiwan Dollars, these illegal lotteries offered jackpots of 15-19x your original stake, dwarfing legal lotteries.

Soon five million Taiwanese were gambling. The lottery gave the Taiwanese a taste of the speculative fervor to follow in the stock market. When the government cracked down on the lotteries in 1987, hundreds of thousands of gamblers poured into stocks for their next fix.

The narrative surrounding Taiwan also changed. In 1987, Taiwan officially became a democracy. Martial law was lifted, new political parties were formed, and media censorship was eased.

Taiwan’s future was bright.

“Republic of Casino.”

In 1985, there were only 400,000 investors in Taiwan. By the end of the 1990's first quarter, active brokerage accounts reached 4.6 million in a country with a population of just 20 million.

 Locals jokingly dubbed Taiwan the “Republic of Casino.”

At the height of the mania in early 1990, stock prices became untethered from reality.

The average P/E ratio hit 100x. That was twice the level of the already-lofty Japanese market.

On some days, trading volume exceeded the combined activity on the New York and Tokyo stock exchanges.

The government also eased stock market rules, and brokerages mushroomed.

Speculators gathered at new brokerage branches opening even in obscure rural areas, desperate to play.

Stock gambling dominated daily life. University students cut class to trade. Housewives and farmers opened accounts. Japanese TV crews flew in to document the spectacle. Frenzied stories flooded the tabloids. High school girls turned to prostitution to raise speculative cash.

Magazines boasted of secrets to getting rich. 60% of financial reporters owned stocks. 84% of this group admitted to insider trading. 30% of those reporters considered abandoning their profession to play the market full-time.

In 1988, three thousand Mercedes-Benzes were sold in Taiwan. That (briefly) made Taiwan the second-largest market in the world. People lined up to buy mink coats worth tens of thousands of Taiwan dollars. Restaurants selling delicacies such as 15,000-dollar abalone (a marine snail) were packed.

Entrepreneurs set up so-called Financial Investment Companies (FICs). These took in money from retail depositors at high-interest rates and speculated in stocks and foreign exchange markets. Even reputable brokers provided illegal margin lending.

Speculators dreamed of hitting the mystical 12,000 level. When it did, investors popped champagne, while others said the market was crazy.

“This Time It’s Different”

One foreign investor focused on Taiwanese stocks at the time remembered thinking to himself:

"Once you're beyond the limits of logic, there's no telling where the market will go. I guess that 12,000 isn't really any crazier than 8,000 or 20,000."

Of course, prices were crazy. But it was a nationwide delusion no one could stop.

A taxi driver thought the stock market was magic. He made a $5 million fortune and traveled the world. He bought his wife, a diamond-encrusted Rolex. When asked about the risks in the market, he said:

“I know some people think the market might fall out of bed, but they just don't understand Taiwan.”

When another visiting American sounded the alarm about an overvalued market, bankers dismissed his warnings with a:

“Foreigners just can’t understand our market!”

Nine years after describing the market as "moribund and illiquid," Marc Faber observed in 1989:

“We feel that the Taiwan market is currently significantly over-priced...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."

The Kuomintang party’s recent election campaign slogan had been "Big Profits and Great Prosperity."

Many interpreted this as an implied guarantee against market losses.

When the bubble inevitably popped, the crash was brutal.

Fortunes built on leverage vanished overnight.

Stockbrokers' offices emptied.

The collapse led to investor protests, an alleged assassination attempt on a regulator, and suicides. In the rubble, illegal investment firms were exposed as frauds. Luxury auto sales cratered as speculators lurched back to reality. Mercedes Benz sales collapsed by 70%. Over 80,000 imported automobiles piled up on the docks in Keelung.

Surprisingly, Taiwan’s overall economy emerged largely unscathed compared to other bubbles. The banking system stayed resilient thanks to tight regulation. Exports rebounded after the casino closed.

Today Taiwan trades at a P/E multiple of only 16x compared to 100x at the height of the bubble in 1990.

And the mania that gripped Taiwan in the 1980s will never be matched.

And Taiwan, in the 1980s, will join a handful of others as one of the most fantastic stock market bubbles the world has ever seen