Commentary

Ice-breaking pacts pave way for bright economic future

• Publication Date：11/27/2009
• Source： Taiwan Today
• By  Norman Yin

The financial memorandums of understanding signed between Taiwan and mainland China’s financial regulators Nov. 16 mark a new era of cross-strait openness and establish a framework for the further development of both sides’ economies.

The MOUs cover regulatory cooperation on banking, insurance, and futures and securities. Exchanges of financial information and establishing a mechanism for dealing with possible financial crises have also been agreed to. But the crux of the pacts is their lifting of most cross-strait financial sector barriers.

In 2008, cross-strait trade reached US$132 billion and accounted for 26.7 percent of Taiwan’s total international trade. But due to sovereignty issues, the capital flow between Taiwan and the mainland, which totaled US$317 billion from January to November 2008, has not reached its potential as financial institutions had to route these funds through third countries.

The MOUs offer banks from both sides a wide spectrum of opportunities. In 1995, Taiwan’s First Sino Bank Ltd. opened in Shanghai, and two years later, Concord Group set up a bank in Ningbo. Since 2002, eight of Taiwan’s banks and 24 securities houses have established representative offices across the strait.

Today, only Fubon Financial Holding Co. Ltd. has a sizeable holding in a mainland bank, snapping up 19.99 percent of Xiamen City Commercial Bank Co. Ltd. for 230 million yuan (NT$1.09 billion) at the end of last year. Fubon Financial plans to increase this stake to 50 percent through a Hong Kong subsidiary.

On July 31, media reports swirled that Carlyle Group and Longreach Group Ltd. may try to merge EnTie Commercial Bank Ltd. and Ta Chong Bank Co. Ltd.—two Taiwan-owned banks they control—to make them more attractive for investors. The groups are also said to have fielded approaches from mainland banks about buying smaller institutions on the island, including Industrial Bank Co. Ltd. and the Bank of Communications Co. Ltd.

With the MOUs covering branch set-ups on both sides, Taiwan’s banks on the mainland can now move to upgrade their representative offices to branch status. The state-owned Bank of Taiwan’s Shanghai office is expected to complete this transformation in 2010.

Mainland banks are expected to quickly establish branches in Taiwan, with at least five signaling an interest in doing so. This follows on from 2002 when three mainland banks applied to open offices on the island but had their plans put on ice by local officials. Industry watchers believe Bank of China Ltd. will establish a branch in Taiwan—the first mainland institution to do so.

Extending outside Taiwan’s oversaturated banking market is another bonus offered by the MOUs. Local interest rate spreads have been capped between 0.3 to 0.8 percent and the return on equity, around 2 to 3 percent. On the mainland, a 5-point spread and 25 percent ROE makes it a much more alluring prospect.

Although the island’s banks enjoy an advantage in business models and efficiency over mainland institutions, their capital size is too small to effectively compete. In the new, cross-strait financial jungle, survival of the fittest will be the order of the day.

Currency exchange between Taiwan and the mainland is another noteworthy area covered by the MOUs, with a New Taiwan dollar and yuan clearance mechanism to be set up shortly. From July 31, 2008 to June 30, Taiwanese banks exchanged 8.7 billion yuan in cash. The local demand for yuan is increasing and a direct currency clearance house could save between 0.25 to 1 percent in exchange costs.

Taiwan’s bourse is also expected to receive a shot in the arm from the pacts. Exchange-traded funds from Hong Kong and Shanghai will trade locally. So far, Shanghai-Shenzhen 300 ETFs, the Hang Seng Index ETF and the Hang Seng H-Share Index ETF are listed on the Taiwan Stock Exchange. The Taiwan 50 ETF is also listing in Hong Kong.

The MOUs will see ETFs from the mainland soon listed on the Taiwan Stock Exchange. Eventually, bourses from Taiwan, Hong Kong and mainland China will establish a joint trading platform, with each exchange selecting 30 to 50 blue-chip companies for listing. This horizontal integration should increase the breadth and depth of the market and enhance its appeal with local and international investors.

Qualified domestic institutional investors from the mainland will also be allowed to invest in Taiwan’s stock market, but the government is mulling restrictions on the scope of these investments in order to avoid bubbles.

For mainland financial institutions, the MOUs represent a good opportunity to access Taiwan’s market and help transform the island into an offshore financial hub for greater China. Nevertheless, when the market first opens, financial institutions might face barriers, but as the market strengthens and develops, these will disappear.

The MOUs cannot satisfy everyone due to existing regulations, but many of these problems can be clarified during negotiations for the proposed cross-strait economic cooperation framework agreement. In a nutshell, the pacts break the financial ice of blocked capital flow across Taiwan Strait for the past 60 years.

—Norman Yin is a professor at National Chengchi University’s Department of Money and Banking. These views are the author’s and not necessarily those of “Taiwan Today.”
Copyright © 2009 by Norman Yin

Write to Taiwan Today at ttonline@mail.gio.gov.tw