Taiwan’s financial institutions are poised to boost their activities in China under a new Cross Straits Service Trade Agreement (CSSTA), as the national legislature starts another round of negotiations on the pact in September.
By David Green
The deal is critical for Taiwan as it faces increasing pressure from South Korea and Hong Kong, which also are vying to expand their participation in the Chinese market. In July, Chinese and South Korean leaders pledged to sign a bilateral free trade pact before the end of the year, while at the same time introducing direct trading of their currencies and allocating a sizeable quota of yuan funds to Seoul for investment in China’s capital markets.
“It is a wake-up call for Taiwan that its first-mover advantage in having a goods trade agreement with China is now under threat, and it cannot afford to delay the signing of the service trade agreement any longer,” said Wai Ho Leong, analyst with Barclays Capital in Taipei.
The service trade agreement promises to relax limits on the shareholding allowed to Taiwanese investors in joint venture investments, assign Taiwan its own RMB Qualified Foreign Institutional Investor (RQFII) quota, and relax or simplify review procedures for all manner of cross-strait financial services transactions.
Mainland Chinese banks will be allowed to take stakes of up to 10 percent in Taiwan-listed banks or financial holding companies, while the amount afforded to a China Qualified Domestic Institutional Investor for investment in Taiwan-listed companies will be $1 billion. At present Taiwan’s Financial Supervisory Commission (FSC) would reject any attempt by a mainland institution to pursue such investments.
“The CSSTA as well as the tandem development of the offshore Chinese Yuan (CNY) capital market will open up more avenues of income for Taiwan’s banks,” says Leong. “It means more interest from foreign equity investors in Taiwan’s financial institutions and real estate.”
Even in the absence of the CSSTA, the amount of RMB settlements handled by the Taipei branch of the Bank of China reached some RMB249 billion.
Student Opposition Slows Vote
Progress on the deal reached an impasse in March after the Sunflower Movement of Taiwanese student protesters raided and occupied the Legislative Yuan in opposition to a proposed vote on the deal occurring without some kind of additional oversight mechanism.
“The protests we have seen in the Legislative Yuan have been a setback, but the relationship between the mainland and Taiwan has been warming over the past few weeks. Very likely a deal might happen if not by the end of this year, then next year,” said Raymond Yeung, senior economist with ANZ in Hong Kong. “Both sides will also watch closely how Taiwanese elections in November will affect the future of cross-straits relations.”
The wider region is already attracting large capital inflows as investors bet the opening of a stock-trading link between Shanghai and Hong Kong will boost both bourses, helping power a 21 percent rebound in the MSCI HK Index since February. For its part, Taiwan’s stock exchange is in talks with Singapore over the possibility of opening a cross-border stock-trading platform. Such an arrangement would lower costs and open wider access for investors in Taipei-listed stocks. Though early days, there has also been suggestion of widening the Shanghai-Hong Kong program to include Taipei.
“A broader Greater China stock connecion with the participation of Taiwan would be very interesting, and would increase the flow of capital, including RMB capital, across the three major markets,” said Yeung. “However, the regulations in the local stock markets and how they protect investors’ interest are more important than whether there is a will to do it, but it could be a future development.”
Domestic Market Liberalization
Even in the absence of an approved CSSTA, Taiwan has been pressing ahead with various measures to liberalize domestic financial markets and improve the competitiveness of its financial institutions, as well as their attractiveness to overseas investors.
“This year, Taiwan’s financial regulators implemented new stimulus measures including long-then-short day trading, and short-selling on shares trading below their latest closing prices, while also increasing stock market liquidity by curbing property speculation, all of which has led to a resilient market rally and growing trading volume,” says Allen Wu, Senior Vice President of Yuanta Financial Holdings.” As of end-August, Taiwan’s main Taiex Index is up almost 9 percent year-to-date, outperforming regional peers—including Hong Kong, Seoul and Singapore.”
In January, Taiwan’s Financial Supervisory Commission (FSC) relaxed restrictions on offshore banking units (OBU) and overseas securities units (OSU), as well as on trust business.
“Another important change is that mutual funds are now allowed to be sold without pre-registration in Taiwan,” adds Fubon Financial Holdings’ President Vivien Hsu. “This will broaden the product lines of our OBUs and OSUs, allowing banks to provide mutual fund products that are as competitiveness as those in Hong Kong and Singapore.”
In foreign exchange markets, Taiwan’s central bank is pursuing an aggressive internationalization and development policy, in March issuing a raft of new approvals that included permission for HSBC Bank (Taiwan) to conduct cross currency swap business with government bonds linked to NTD and foreign currencies.
The Next Steps
In part thanks to the easing regulatory environment, Taiwan’s financial sector is for the time being in fine health. Cathay Financial Holdings, the island’s largest financial holdings company by assets, said in July that first-half net profit rose by about 104 percent to NT$30.61 billion. While Fubon Financial Holdings, the second-largest, reported its net income in the same period was up by 53 percent to NT$27.32 billion.
Perhaps the most eye-catching investment was Fubon Financial’s acquisition of an 80 percent stake in China’s First Sino Bank for RMB6.45 billion, approved in December. The purchase neatly sidestepped rules limiting Taiwanese ownership of a mainland bank to 20 percent because First Sino was a joint venture between investors from Taiwan, Hong Kong and China. The deal built on Fubon’s existing 19.9 percent holding in Xiamen bank and 100 percent ownership of Fubon Bank HK.
“Fubon aims to establish a banking platform that extends across Greater China,” said Hsu. “For example, Xiamen Bank’s ATM cardholders enjoy free access to NTD cash withdrawals in Taipei Fubon Bank’s ATM machines, at a favorable exchange rate. Moreover, once the ‘Shanghai-Hong Kong Stock Connect’ program kicks off, Fubon Bank HK’s stock trading platform will be available to customers across our banking subsidiaries.”
The Fubon model is one that other Taiwanese banks are likely to follow assuming the CSSTA is signed, according to ANZ’s Yeung. “I foresee that many of the Taiwanese banks will invest in China on a wholly-owned basis, rather than partner with a mainland local bank,” he said. “The opportunity for acquisitions will grow as we are expecting a consolidation of the Chinese banking sector. Some smaller banks or microfinance institutions will welcome investment from Taiwanese institutions as they look to up their scale.”
Yuanta also plans to build on its existing Hong Kong operations and representative offices in Shanghai, Beijing and Shenzhen, according to Wu.
“Overseas expansion has now become our top initiative,” he says. “MOUs with our three partners in China have been signed and we are ready to move into Shenzhen, China once the service trade agreement passes.”
Rising Internationalization
While the CSSTA remains the key to unlocking the island’s potential, Taiwan’s financial firms are already seeking opportunities elsewhere. In May, Yuanta Securities obtained approval for its purchase of a 53 percent stake in South Korea’s Tong Yang Securities, supplementing its existing presence in Cambodia and the Philippines.
Elsewhere, Cathy United Bank and First Bank have received approval to open branches in Laos, while a handful of other Taiwanese lenders are set to establish offices in Myanmar, and Bank of Taiwan is reported to be mulling entry into Mumbai, India.
Taiwan is already making great progress towards becoming a more international financial hub. Domestic and overseas institutional investors, whether in mainland China or elsewhere, now have an access to an ever expanding portfolio of investment opportunities, denominated in a wider selection of currencies. Now it remains for the island’s legislators to negotiate a successful signing of the CSSTA to provide the icing on the cake.