Exclusive | Taiwan Is MSCI's Top EM Market But Foreign Money Is Stuck

Taiwan is now the single largest market in the MSCI Emerging Markets Index at a weighting of 26.85%, but a former Wall Street portfolio manager turned academic says the country cannot make its next move in capital markets until someone does a piece of research that has never been done.

Orina Chang (張綺真), chair professor and associate dean of the International College of Finance at National Sun Yat-sen University, told The Storm Media in a September 14 interview in Taipei that index weighting and market structure are two different things, and that Taiwan has confused them. Chang spent more than two decades in capital markets before moving into academia, serving as a senior portfolio manager and head of alternative investments at Morgan Stanley, a director at OppenheimerFunds, and a seed investor at the Carlyle Group.

"The real question isn't how high the weight is," she said. "It's what structural problems still remain beyond the weight."

The Taiwan Stock Exchange, citing MSCI data, said in August that Taiwan had become the heaviest weighted market in the emerging markets benchmark. Under MSCI's third quarter review, Taiwan's weighting rose to 26.85%, effective after the close of trading at the end of August. A year earlier it stood at less than 20%.

The inflection came at the start of this year. Data compiled by Bloomberg showed Taiwan at 21.06% at the end of January against China's 20.93%, the first such crossover since mid 2007.

A narrow group of companies is carrying the weight. Taiwan Semiconductor Manufacturing Co. alone accounts for 15.46% of the index, making it the largest single constituent, with MediaTek, Delta Electronics, and Hon Hai Precision also in the top 10.

Chang estimates foreign institutional allocations to Taiwan within emerging market mandates run at roughly 27%, broadly consistent with the official weighting. The concentration, she noted, cuts both ways: the heavier Taiwan sits in global portfolios, the greater its exposure if the AI cycle reverses.

MSCI's market classification determines the destination of trillions of dollars in passive capital. Chang identified two features that keep Taiwan classified as an emerging market: management of the exchange rate, and operational rules that slow foreign investors down at both ends of a trade.

"Taiwan has many rules that are not fully free-market rules," she said. "The stock market has a 10% daily price movement limit, up and down. You have an entire set of operational rules for foreign investors that makes it relatively difficult to enter and exit." Foreign institutions have walked her through those technical obstacles in detail, she said, adding that South Korea faces the same situation.

On the currency, Chang argued that the arrangement reflects economic structure rather than oversight. Taiwan is an export driven economy, and its central bank manages the New Taiwan dollar accordingly. "If we let capital flow in that freely and that fast, the NT dollar appreciates sharply, and that hurts our export industries," she said. She noted that many exporters are themselves listed companies that would benefit from equity market inflows: "One side loses, the other benefits."

Chang raised a variable that rarely surfaces in Taiwan's reform debate. Emerging market ETFs are required by mandate to track index weightings, which means a rising Taiwan weighting converts directly into buying. In that sense 26.85% is not only a ranking, it is a capital allocation mechanism. Reclassification to developed market status would remove Taiwan from that mechanism entirely.

"I don't know if it's actually a good thing for Taiwan to leave the emerging markets category, because you lose that identity," she said. She is studying other markets that have completed the transition, observing how their capital flows changed, and working backward to what it would mean for Taiwan.

Chang's most concrete finding concerns the cost hidden behind a technical obstacle. U.S. listed ETFs that invest in Taiwan equities forfeit their tax efficiency, because Taiwan regulations do not permit the in-kind redemption mechanism these funds depend on for tax-free portfolio rebalancing. Instead they must sell holdings outright, a taxable event.

The scale of what is shut out is hard to overstate. "The U.S. ETF market is enormous. It has $16.5 trillion in assets, which is 80 times the size of Taiwan's stock market. That's staggering," she said.

The discovery came out of an entirely different project. Chang had been thinking about a teaching exercise in which her university would list an ETF in the United States, walk students through the entire process, channel U.S. dollar capital back into Taiwanese companies, and invite Taiwanese leaders to ring the bell at the exchange as a form of national branding. "It was a crazy idea," she said. "Then I started researching it and discovered: if you want to invest in Taiwanese companies, the ETF loses its tax-advantaged status. That's how I found out."

Her caution about sweeping change comes from a reform list recently delivered to Taipei. She cited an American fund industry group that visited Taiwan and presented a report calling for 17 separate regulatory changes.

"I told them a few days ago: you have to cut some of these. We can't possibly do seventeen. Give me your most important three, give me deliverable asks. When you ask for seventeen things at once, everyone gets lost," she said. At least one item on that list would disadvantage domestic brokers, she added, and no one had calculated whether the aggregate effect would expand the market or simply redistribute gains at local firms' expense. "Whether the pie gets bigger so everyone benefits, or whether competition intensifies to the point where local players are hurt, nobody has worked that out."

Asked which two or three reforms she would prioritize, Chang declined to offer a list. "I don't have three reforms I can immediately recommend," she said. In her view, every proposed change requires more granular analysis before it can be responsibly advanced.

Her proposal is instead institutional: a standing committee that brings foreign investors, foreign ETF issuers, domestic brokers, and academics to the same table, chaired by academics, with a mandate to produce a white paper.

The design logic turns on accountability. "The responsible party is academia, completely neutral, but needing sufficient understanding of U.S. markets, Taiwan's culture, and Taiwan's institutions," she said. Academics are suited to the role precisely because they have no financial stake in the outcome: "The money goes to the industry. We don't make money."

She was equally clear that the process will produce losers. "We chair the research, examine who genuinely benefits and who genuinely loses, and identify the trade-offs. There is no perfect solution. We're just trying to find the best balance we can." Because currency management, market regulation, and tax policy fall under different agencies, bringing those bodies into a shared public analytical framework is, in her view, exactly the mechanism Taiwan currently lacks.

Also present at the interview was former British Defence Secretary Sir Gavin Williamson, who invoked the United Kingdom's 1986 financial deregulation, the "Big Bang," as a caution about sequencing. "There may be eight things everyone can quickly agree on and that are worth doing," he said, "but two sticking points. It's often those two unresolved issues that prevent you from doing even the things you could." Chang offered her own implementation method, which is piloting: "Just pick one or two cases, or a first cohort of participants, and do it, see how it actually works in practice. We have the vision, we have the plan. What comes next is clean execution."

Beneath the market structure discussion, Chang identified what she called a cost accounting problem, one that traces back to how Taiwan's banking sector assesses risk.

"Taiwan's banks want actual, tangible value or assets, a factory, a plant, real estate, property. This is deeply counterintuitive for technology companies," she said. The real assets of a technology company are its people, its research, and its software, all of which are expensed rather than capitalized, and therefore invisible on the balance sheet banks use to evaluate creditworthiness.

Her conclusion is pointed: "This is why Taiwan's strength lies in the entire hardware ecosystem for AI, and not in any software, because software doesn't show up on your financial statements." It is the same message the index structure sends: Taiwan's weighting is almost entirely derived from the hardware supply chain.

The same structural conservatism that shapes bank lending also keeps private equity capital at a distance. Drawing on her experience at Carlyle, Chang said private equity investors require a credible exit within three to five years, and at Taiwan's market scale that typically means a trade sale rather than a public listing.

"When you invest in private equity, you need to be confident there will be an exit in three or five years. The fact that we don't have these major private equity players investing in Taiwan is a massive missed opportunity, because there's no exit," she said. She added that considerable foreign capital would like exposure to Taiwan's unlisted companies but cannot find a viable path in.

She reframed the capital flow argument in closing: "We shouldn't only be exporting things outward." Enabling foreign investment into Taiwan, in her view, is as important to the country's international profile as export growth. "The more you block it, the less good it does for this country."

An index weighting can be pushed up by a single industry cycle, and pulled down by the same one. That, Chang argues, is precisely why Taiwan needs to do the accounting before it can meaningfully advance the conversation about financial market opening and reform.

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