Boom and bust for Taiwan and mainland not the same

PUBLISHED : Sunday, 15 July, 2012, 12:00am
UPDATED : Sunday, 15 July, 2012, 12:00am


The composite index, after two years of sharp falls in 2010 and 2011, advanced nearly 12 per cent as of early March this year before retreating. It also fell below last year's dismal year-end close on January 6.

SCMP, July 10

It's a notable quirk of emerging stock markets that they tend to stage enormous bull rallies when they first emerge from their cocoons and growing numbers of investors first take serious note of them.

Inevitably it all ends in tears again but this is never the end of the story. The stocks are still listed, there is still demand for them at lower prices and slowly prices recover. The extent of the recovery, the speed of it and the performance of the underlying economy all have their story to tell about just how sophisticated that market is.

Today I have a story of two markets, Taiwan's and the mainland's. They both went through that initial boom and bust but the story was not the same in each.

Taiwan's boom and bust took place more than 20 years ago. The market started to rise late in 1986 with pending financial reforms. Just over three years later, in January 1990, the Taiex capitalisation weighted index had shot up more than 1,200 fold. Given that the NT dollar was also strong during that period, in US dollar terms share prices rose more than 1,700 fold. Who needs to send a man to Mars when Taiwan has already sent stocks to Neptune?

What I have done in the first chart is compare this rocket, shown in blue and transported forward in time by 19 years, with the performance of the Shanghai Composite Index in US terms over its big run from October 2005 to October 2007. I have based each on a value of 100 for the approximate start date of its rally.

It doesn't look like much of a rally for Shanghai compared with Taiwan and it was over much sooner, although I'll grant you Taiwan had a harder fall. After more than 20 years the Taiex has never again come close to its 1990 peak. In many ways, however, it has been firmer than Shanghai's post-bust performance.

But now another comparison. Stock markets can be expected to reflect the underlying performance of the economies on which they depend. The second chart shows you the US dollar performance of the Taiwan and mainland economies at the relevant times, with Taiwan made to go through 19-year forward time travel again.

They are pretty much matched in economic performance during their stock market booms, with the mainland's showing perhaps a stronger recovery post-bust ... if you believe Beijing's official numbers.

So why did the Shanghai Composite never enjoy as big a lift as what pushed the Taiex up in its emerging boom and why is it still not recovering?

Good question, and you can hear a hundred answers any time you want. Mainland investors, for instance, blame too big a flood of new issues in Shanghai.

I wouldn't be so sure. If the offerings are good, no flood of offerings drowns investors. Evidence is growing that too many offerings were of a poor standard. This market serves government policy objectives rather than investors.