The Taiwan Banker

The so-called “golden cross” is the talk of the investment world these days: Taiwan stocks have been rising year after year, while Hong Kong stocks have continually slumped. This milestone is the inevitable result of trends some time in the making. The Taiwan Weighted Index (TWII) reached 1,000 points for the first time in 1986, and then hit a record high of 12,682 points in 1990 amid the wave of “hot money.” After 1990, however, the TWII fell to a low of 2,485 points. Since 1992, the Hang Seng index has led the TWII. In 2018, gap reached a maximum of 22,358 points as the Hang Seng Index reached 33,484, with the TWII at 11,126. Chinese expansion hollowed out Taiwan’s stock market The reason for that gap was that Taiwan had experienced a crisis. It once had a lot of money, but its industrial sector had been hollowed out due to bad government decisions. At the time, it debated between prudent caution and “boldly marching west.” Not only did the electronics industry boom, but even the traditional manufacturing industry seemed to be quietly doing well. Countless hidden champions were born. Even as its economy was growing, however, it was only absorbing productivity from China’s cheap labor force. Without the benefits of cheap labor and tax cuts, businesses faced higher operational challenges. Taiwan’s competitiveness companies gradually declined, and the stock market was hollowed out. The Tsai Ing-wen administration coordinated capital repatriation and guided investment in real industries, encouraging Taiwanese businesses to return, and allowing companies to base themselves in Taiwan to expand their global presence and marketing around the world. Over the past few years, Taiwan’s industry has become stronger and more resilient, becoming visible to international investors. The stock market also rose accordingly from about 8,000 points to 18,619. Several key factors underpinned this rise. One was semiconductors. The price of TSMC, the world’s largest chip manufacturer stock, increased by 3 times, earning the attention of foreign investors and significantly contributing to the market. Other technology stocks have also increased by 4-6 times. Several decades later, Taiwanese electronics manufacturers have seized the latest international trends. The trade war restarted the economy Following the trade war, supply chain restructuring created an excellent opportunity for transformation. At that time, the Tsai administration used more preferential taxes to attract capital back onshore, and promoted the “5+2” strategic “innovative industries”: green energy, Asian Silicon Valley, defense industry, smart machinery, biotechnology and medicine, circular economy, and new agriculture. Tsai called it, “a different kind of economics.” In the past, the government would frequently guide the leading industries, but the “5+2” system integrates new and existing industries to drive industries and the overall economy, along with structural transformation allowing Taiwan’s economy to truly mature. In addition to the favorable economics and geopolitics, Taiwan has also benefitted from simple luck. With China’s implosion, Taiwan must now stand on its own. If its economic upgrade is successful, the future will be limitless. On November 28, 2023, after 31 years, the TWII and Hang Seng Index finally achieved their second golden cross. Taiwan stocks closed at 17,341.25, about 20 points ahead of Hong Kong. Hong Kong stocks rose slightly in late trading to beat Taiwan by 12.89 points. Recently, the TWII has stabilized above 17,000, while the Hang Seng has dropped to 16,000. The seesaw trend has become increasingly obvious. Of course, stock market indices are weighted calculations which cannot be compared directly. Perhaps it is more realistic to use total market cap. Today, the capitalization of Taiwan’s stock market is almost NT$56 trillion, up from NT$30 trillion in 2015; Hong Kong stocks have now approached HK$30 trillion, up from HK$25 trillion in 2015; in 2020, they approached HK$50 trillion. Thus, even though Hong Kong is booming, stocks are only returning to their original level. Although Taiwan still far lags Hong Kong in market value, this does not change the overall trend. Hong Kong stocks live and die with China Many observers have pointed to the obvious reasons behind this reversal in fortune. China claims that the Sino-British Joint Declaration is only a “historical document,” and has torn up Hong Kong’s democratic autonomy. The 2020 National Security Law brings Hong Kong under Beijing’s de facto control. In the past, Hong Kong was a window for investing in China with guaranteed rule of law, based on the instability and unreliability of the Chinese legal system, which could not protect the personal safety and property rights of investors. A homogenized Hong Kong is eliminating the essential meaning of its existence, which will only lead to decline. More fundamentally, Hong Kong is intrinsically tied to China’s economy. Since 2000, as the “China collapse theory” constantly warned the world of a Chinese economic failure, the world has puzzled over the illusion of an ever-expanding “red sun.” As a result, the collapsists have been subject to criticism and ridicule for 20 years. It was only after the pandemic, real estate crisis, and trade war that the collapse showed signs of fruition. In fact, it was the massive flow of hot money which caused the collapse in the first place. The way the world imagines economic collapse is like a supernova explosion, sweeping everything away, but that is only how large stars collapse at the end of their lifetimes. Medium-sized stars, such as our sun, become bloated red giants. The red-hot plasma will even expand to engulf the earth. Astronomy and economics can corroborate each other. When large economies like the US fail, the resulting supernova sweeps the world, like the pre-war Great Depression which triggered World War II. China is however only a medium-sized economy. In 2000, just as some people began to realize that China was about to collapse, China expanded extremely rapidly, becoming not a red sun, but a red giant. China enters the middle-income trap This phenomenon is known as the “middle-income trap.” Just as stars initially use hydrogen as a ready fuel, people generally work hard in order to improve their future. At the beginning of China’s Reform and Opening, even basic food and clothing were scarce. With only food and shelter, people were willing to work hard to improve their lives. Cheap labor helped turn China into the “world's factory.” As people continue to work hard and basic standards of living improve, their demands increase. They might have once been satisfied with bicycles, but now they need motorcycles, and then cars; before, they lived in dilapidated houses, but they now have reinforced concrete buildings; in the past, anything to wear would be okay, but we now need fast fashion; gutter oil and rancid water were once acceptable, but now we require basic food safety. The total national social cost of training and maintaining workers has risen steadily. If their labor does not create more added value, the economy will inevitably fail. This is why most developing countries crash. The middle-income trap is like a star that has used up all its hydrogen and can only use helium as fuel, which requires a higher threshold for fusion. The expansion of the red giant only destroys the original star. As the overheated shell expands ever outward, only the faulty core is exposed. Only a white dwarf remains. Before the 1990s, the Hong Kong stock market was supported by local conglomerates such as Cheung Kong Holdings, New World, Sun Hung Kai and Henderson Land, as well as the financial industry. After the 1990s, many state-owned enterprises were listed in Hong Kong. The prices of any stock with “China” in front of its name increased several times. Later, Tencent and Meituan dominated the changes in Hong Kong stocks. In recent years, Chinese concept stocks such as Alibaba, JD.com, Baidu, Weilai, Xpeng, and Ideal listed in Hong Kong. New economy stocks have become a major influence on the overall market. After “common prosperity,” however, the vitality of Tencent and Alibaba was severely damaged. The government vigorously supported Pinduoduo, and JD.com, while the others subsequently plummeted. Hong Kong’s heavyweight value stocks could not recover. Now China’s economy is imploding, and foreign capital is gradually flowing out. The financial industry is not as attractive as it once was, and the local conglomerates remain sluggish. Of course, while not easy, there are still more areas where Taiwan stocks can continue growing. Regulations, skills, and overall social concepts must be adjusted rapidly in order to seize this rare opportunity. No matter what, Taiwan no longer needs China for its economic and industrial growth. Now is time to focus on itself. The author of this article is the digital content marketing director of TechNews and a consultant of at TABF. He studies history in his spare time. He is the author of the Golden Tripod-Awarded “Rubber Overthrew the Manchu Qing Dynasty,” and co-authored “Fintech power pack for rural people” with TABF president Hank Huang.