the Hong Kong securities and derivatives markets
from Taiwanese investors remains small. However,
Hong Kong lists numerous companies controlled
by Taiwanese interests.
Taiwan is one of the more developed economies
in Asia and has an active stock market. Given
the close economic relationships and the common
language, one might expect active participation
from Taiwanese investors in the Hong Kong markets
where many Mainland enterprises are listed. However,
Taiwanese participation in the Hong Kong market
remains relatively low.
This article provides an overview of Taiwanese
participation in HKEx's securities and derivatives
markets by utilising the results of recent HKEx's
surveys and other relevant data available. It
also describes Taiwan's other financial activities
in Hong Kong.
Taiwan's Economic Background
Taiwan ranked 20th among the world economies in
2004 with a gross domestic product (GDP) that
amounted to US$305 billion1. In Asia,
Taiwan was the fourth-largest economy, after Japan,
Mainland China and Korea. Hong Kong was fifth.
During the past decade, Taiwan exhibited high
positive economic growth except for a contraction
of 2.2% in 2001 (Figure 1). The leading stock
market index, the TAIEX, dipped to 3,585 points
in the same year (Figure 2).
According to the statistics of the World Federation
of Exchanges (WFE), the market capitalisation
of the Taiwan stock market was US$443 billion
(145% of its GDP) at the end of 2004, ranking
13th in the world. Though not large, the market
was active in tradingit ranked second in
Asia and 10th in the world in terms of share trading
value in 2004. The annual turnover ratio2
was high162% in 2004, the fourth highest
in the world. In comparison, Hong Kong ranked
ninth in terms of market capitalisation and 16th
in terms of share trading value. The annual turnover
ratio of the Hong Kong market in 2004 was 51%,
ranking 24th in the world.
Taiwan also has a rather active derivatives market.
The Taiwan Futures Exchange (TAIFEX) established
an annual volume record of 59 million contracts
in 2004, ranking 20th in the world, according
to the statistics of the Futures Industry Association.
In comparison, Hong Kong ranked 35th.
Taiwan is a major investor in other Asian economies.
In 2004, the approved outward (direct) investment
to Asian countries amounted to US$8.2 billion3
, with the majority in Mainland China. This accounted
for 80% of its total outward investment, representing
about 3% of its GDP.
Taiwanese Activity in HKEx Markets
The annual HKEx Cash Market Transaction Survey
gathers information on the contribution of trading
value in the HKEx cash market by origin. Taiwan
was separately identified in the survey for the
first time in the 2001/02 survey. As shown in
Figure 3, the relative contribution from Taiwan
to total cash market trading diminished over the
past three years to just 0.2% in 2003/04.
In May 1998, the Hong Kong Futures Exchange (HKFE)
launched Taiwan equity index products, the HKFE
Taiwan Index Futures and Options. However, trading
of the products was inactive and it was suspended
in September 1999.
As found by the annual HKEx Derivatives Market
Transaction Survey, Taiwan's contribution to HKEx
derivatives market volume has remained small except
for a sharp rise in 2001/02. In 2003/04, the contribution
from Taiwan to total derivatives market turnover
volume was only 0.3%. (Figure 4)
As at the end of May 2005, a total of 32 listed
companies in Hong Kong - 23 on the Main Board
and nine on the Growth Enterprise Market (GEM)
- had their majority interests coming from Taiwan,
representing 2.9% of the total number of listed
companies and accounting for 1.6% (HK$105.7 billion)
of the total market capitalisation. During the
first five months of 2005, the aggregate turnover
value of these Taiwanese stocks accounted for
only 0.72% (HK$12.0 billion) of the market total.
Nevertheless, among them, one stock, Yue Yuen
Industrial (Holdings) Limited, has been a Hang
Seng Index constituent since 9 June 2003.
Exchange Participant dimension
According to HKEx's internal records, there are
currently 22 Stock Exchange Participants (SEPs)
with Taiwanese interests, representing 4% of SEPs
by number. Among them, three are also Futures
Exchange Participants (FEPs) and six have sister
companies which are FEPs. These Taiwanese brokers
are mostly medium- or small-sized brokers in terms
of market turnover, contributing in aggregate
about 2.2% of cash market trading and 5.5% of
derivatives market trading4.
Other Taiwanese Investment in Hong Kong
Taiwan's outward investment
As shown in Figure 5, Taiwan's outward investment
in Hong Kong has varied over the years. It peaked
at US$641 million in 2003 and declined to US$140
million in 2004.
In contrast, Taiwan's outward investment in Mainland
China is much larger. It shot up in 2002, rose
to the peak at US$7.7 billion in 2003 and remained
close to US$7 billion in 2004.
Taiwanese financial activity in Hong Kong
The Taiwanese presence among authorised institutions
(comprising licensed banks, restricted license
banks and deposit-taking companies) in Hong Kong
gradually increased from seven in 2000 to 15 in
2004, as shown in Figure 6. In terms of number
of licensed banks in Hong Kong, Taiwan (14 in
number) ranked first in 2004, followed by Mainland
China (13) and Japan (12). However, statistics
on the business activity of the Taiwanese authorised
institutions in Hong Kong are not publicly available.
Taiwan Individual Investors' Participation
in Domestic Markets
According to the Taiwan Stock Exchange (TWSE),
the majority of securities trading in Taiwan comes
from domestic individual investors, albeit that
the contribution has decreased gradually from
88% in 1999 to 76% in 2004 (Figure 7). As at the
end of 2004, Taiwanese individuals accounted for
48% of the total share ownership in Taiwan-listed
Taiwanese individual investors are also the major
contributor to derivatives trading on TAIFEX,
though the percentage contribution has also decreased
over the years - from 94% in 1999 to 66% in 2004
(Figure 8). As at the end of 2004, the number
of accounts of Taiwanese individuals in TAIFEX
reached 1,016,348 - 99% of the total number of
TAIFEX investor accounts.
The high retail participation rate in both the
Taiwan securities and derivatives markets is believed
to be a major factor underlying the high level
of trading in both markets. However, this did
not translate into high Taiwanese participation
in the Hong Kong markets. This may relate to the
fact that it is difficult for retail investors
to invest directly in overseas markets.
Taiwanese investors are only minor users of Hong
Kong's stock and derivatives markets. While Mainland
China has attracted much direct investment from
Taiwan, the Hong Kong stock market, though with
many listed Mainland enterprises, has gained little
Taiwanese portfolio investment.
1Source: IMD World Competitiveness Online
2Using WFE 2004 figures for calculation
by using the formula: turnover ratio = total value
of share trading for the whole year / year-end
3Source: Taiwan Economic Forum (April 2005) published
by Council for Economic Planning and Development,
4For the study periods of Cash Market
Transaction Survey 2003/04 and Derivatives Market
Transaction Survey 2003/04 respectively.