In late November, the Taiwan Stock Exchange (TWSE) weighted index closed at 17,433 points, while the Hang Seng Index (HSI) fell to 17,042 points. It's a moment for the ages. "Taiwan beats Hong Kong" became a trending topic in the media.

The stock market in Hong Kong started off on a high note this year, but it shed 14% of its value, falling from 19,781 to almost only 17,000 points. The situation flipped on Taiwan's side, where the market climbed 23%, from 14,137 to 17,370 points.

What is the meaning of this fateful meeting of the stock markets?

The answer may disappoint many: comparing two indexes is not meaningful. 

The function of an index is to serve as a quantified indicator that measures the booms and busts of a stock market, making it more convenient for investors to evaluate the status of the overall market.

Which is to say, the index was created only to be compared with itself.

In the case of the HSI, the stock prices and the number of stocks offered by the initial 33 companies on the HSI on July 31st, 1964, are used as the baseline, represented as 100 points. This is the starting point from which all advancements and regressions are calculated. To this day, only 80 companies make up the constituents of the HSI, which is far from all the listed companies in Hong Kong.

As for the TWSE, it uses the stock market in 1966 as the baseline. It encompasses all the listed companies in Taiwan and assigns weights according to market value. All 971 public companies in Taiwan are counted as constituents, with TSMC making up 27% of the total value.

Different markets, different trading dates, different categories of companies. The bases of the two indexes are too diverse to offer any meaningful insight. To make another example, the U.S. Nasdaq totals at more than 14,200 points. Obviously, that doesn't mean it's less valuable than the TWSE.

"It would make sense to compare the values of different stock markets ," says Cathay Futures Consultant analyst Tsai Ming-han (蔡明翰).

Market value gap between TWSE and HSI at three-year low

Market value reflects the total value of all the stocks of the listed companies. The aggregate value of the listed companies in a country equates to the economic contribution that nation makes to the global market.

As of October, the market value of all the listed Taiwanese companies amounted to about US$1.5 trillion. Hong Kong companies totaled US$4.1 trillion. In the international economic system, Taiwan's slice is less than half of Hong Kong.

But if you look at market trends, you'll see that in the last decade, Taiwanese stocks started at US$0.8 trillion and have now almost doubled in value. Value grew during four of the last five years. During the same period, Hong Kong stocks grew 30% and gained US$1 trillion in value. It peaked in 2020 but has been on a downhill slide ever since.

The gap between the values of TWSE and HSI has reached a three-year low.

Stock prices have embodied the same trend. Since reaching its high of 33,000 points in 2018, the HSI has fallen by nearly 40%. In the same period, Taiwanese stocks grew almost 50% in value.

In other words, long before the numbers matched up, the prosperity and contributions of the two stock markets were clear for all to see.

A Tale of Two Different Fates

The woes of the HSI are the result of foreign capital fleeing Hong Kong in the wake of the China-U.S. trade war, the Hong Kong protests, and the passing of the Hong Kong national security law in 2020.

The trade war between the two superpowers has forced Hong Kong and Taiwan to choose sides. Taiwan sided with the U.S., while Hong Kong is obviously in China's corner. The fallout from those decisions has become tangible this year.

"Hong Kong stocks are indistinguishable from Chinese stocks," says Ta-kang Yang (楊達康), an analyst at SinoPac Inv. Service. Out of the top ten constituents in the HSI, some are web companies like Tencent, Alibaba, and Meituan; while others are financial stocks like HSBC Holdings and China Construction Bank. Seven out of the ten are funded by Chinese capital.

Chinese companies are using Hong Kong as a source of foreign capital. They have also become the main body of the Hong Kong stock market. Any declines in the Chinese economy can negatively affect Hong Kong.

According to Yang, Hong Kong has natural limitations that compel it to focus on service-related industries, such as web, finance, realty, and retail. These are cyclical industries that would naturally be impacted by China's slowing economy and realty debt crisis. On the other hand, seven of the TWSE's top ten constituents are electronics companies. These are fast-growing stocks that prosper alongside the global market.

Last but not least, the Fed raising interest rates was another blow to the HSI.

Because Hong Kong adopts a "linked exchange rate system," the Hong Kong dollar is linked to the American dollar. A rising tide lifts both interest rates. But that expedites the drain of market capital. In contrast, Taiwan can adjust its exchange rate to mitigate some of the damage.

Since the Fed has held back from raising the rates again, the repercussions of a higher interest rate have become less obvious. Tsai points out that the price-to-earning ratio of Hong Kong stocks is now less than a magnitude of ten, which lowers the entry barrier for investors. 

However, so long as the HSI is linked to the Chinese economy, and so long as foreign investors worry about the Chinese government interfering with Hong Kong's financial freedom, that is a weight that Hong Kong will have to carry as Taiwan continues to gain ground.

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Translated by Jack Chou
Uploaded by Ian Huang