Political uncertainty and regulation has blighted the progress on the Economic Co-Operation Framework Agreement between Taiwan and China. Now, slowly but surely, agreements are finally being reached that should benefit Taiwan's banks and businesses.

Taiwan is taking a cautious approach to the Chinese market, even though economic co-operation between Taiwan and China offers the potential for Taiwanese banks to expand beyond their highly competitive domestic market. 

The Economic Co-operation Framework Agreement (ECFA) between Taiwan and China, although one of the most significant agreements in modern history between the two countries, is still in its early stages of development. But, in the long term, it has the potential to change Taiwan's competitive landscape and reconfigure the country's market, once relations are fully liberalised. 

Slow start

For now, progress is slow, not just because of regulatory limitations that have been put in place, but also because of the upcoming Taiwanese presidential election, which many observers predict could impact the relationship between Taiwan and China. 

The memorandum of understanding (MOU) on co-operation in financial supervision between the two countries was signed in November in 2009, with the full agreement signed in June 2010. And in July 2011, further progress was made in the deregulation of renminbi business for Taiwan’s offshore business units (OBU) and overseas branches.

In the past, Taiwanese businesses operating in China were unable to transfer their renminbi funds to a Taiwanese bank and had to rely on the services of international banks instead. Now, however, as Kenneth Lo, chairman of the Industrial Bank of Taiwan (IBT) Group explains, corporates and individuals can open renminbi accounts in OBUs – which are physically onshore, but from a regulatory point of view are offshore – through their overseas subsidiaries. It is hoped that this step will lead to greater interchangeability between the Taiwan dollar and the renminbi in the future.

“It takes some time to build the renminbi deposits, then the next stage would be to have renminbi lending – we still hope that we can do more renminbi business,” says Mr Lo. 

Limited exposure

So far only a handful of Taiwanese banks have established a presence in China. Taiwan Ratings noted just after the MOU was signed that: “Any expansion into these markets will require careful negotiation, and history suggests that Taiwan’s banks will move slowly in the beginning, with little immediate impact on their credit profiles… Our observations of Taiwan banks’ overseas activities shows that they tend to focus on accumulating experience in the early years of their overseas expansion plans.” 

Susan Chang, chairperson of the Bank of Taiwan, says: “The main purpose for the Taiwanese banks [to expand into China] is to understand more about their clients in mainland China”. 

The main purpose for the Taiwanese banks [to expand into China] is to understand more about their clients in mainland China

Susan Chang

Victor Kung, president of Fubon Financial, a financial holding company, says that the Taiwanese banks' approach has been cautious, almost timid. He compares the pace of expansion in the banking industry with that in the air transportation industry; initially only a few flights were introduced between Taiwan and China, but now flights between the two countries are far more frequent. “In the past, experience of cross-trade opening [has shown that] in the beginning it is very slow, but once people overcome the initial political sensitivity then the pace becomes very quick,” Mr Kung says.

Reaping the rewards

While the pace may quicken over the next few years, it could take some time for Taiwan’s banks to reap the benefits from the agreements with China. Eunice Fan, associate director at Taiwan Ratings, says that the scope for banking in China has not yet reached its potential, as Taiwan’s banks still need more time to set up branches “so the subsidiary potential profit contribution to overall profits of banks will still be quite limited for the next two to three years”. 

Mr Lo at IBT Group adds that it will be two to three years before Taiwanese banks can enjoy the fruits of their labours in China as the business that they can do there is still quite limited. For this reason, says Mr Lo, it makes sense to pursue other businesses outside of mainstream banking because of the length of time it takes to establish branches in China.  

Mr Lo says that the leasing business provides opportunities to the Taiwanese players, particularly as this is an area that is not developed in China. For this reason, IBT established IBT International Leasing Corp in Suzhou, China, in June 2011, and Mr Lo anticipates that the leasing company can generate profits within a year. 

While establishing a branch network may be slow for Taiwanese players, there is also another reason for the cautious approach to the Chinese market. The results of the Taiwanese election in January 2012 could impact the pace at which further co-operation between the two countries takes place. 

Changes in government

Fitch Ratings notes that the political relationship between China and Taiwan has been substantially improved since Ma Ying-jeou of the Kuomintang Party became president of Taiwan in 2008. The ECFA was signed under his administration, and there is much debate over what the status of the agreement will be if there is a change in government. “China could change its stance upon a change to an administration from a different party,” reports Fitch Ratings.

When asked whether the co-operation with China under ECFA is independent of the political situation, Mr Lo of IBT Group says: “We always say business is business and politics is politics.” However, he adds that ECFA is good for Taiwan – regardless of who is in power – because the trade between the two countries is increasing, and the size of the Chinese market is huge. 

Jerry Chen, general manager and head of DBS Bank Taiwan, says that the co-operation has reached the “point of no return” and now that the door has been opened on trade agreements, it would not be possible to close it. 

China could change its stance upon a change to an administration from a different party

Fitch Ratings

Others argue that the ECFA and the political situation are more intertwined. Mr Kung of Fubon Financial says: “I think China is anxiously watching what is going to happen,” adding that as well as Taiwanese players, the Chinese are also waiting for the outcome of the next election before deciding how to develop the co-operation further. 

It could be argued that if China agrees to certain concessions under the current administration, which enjoys a good relationship with China, it might find itself in a situation where it cannot withdraw any favourable treatment if the opposition party wins the election, and there is then a change in sentiment towards China.  

Long-lasting relationship

Regardless of the outcome of the election, there will continue to be trade relationships between Taiwan and China. Ms Chang of the Bank of Taiwan says that there have been numerous mutual delegations between Taiwan and China and that the relationship is growing very fast. This kind of development could mean that the pace of economic co-operation will quicken if the current administration is re-elected. 

Jesse Ding, president of EnTie Bank, says that the ECFA could be impacted by the results of the upcoming election, but he takes a longer-term view as the co-operation is still at an early stage. “The cross-strait relationship might be impacted by the election results, but if you look further ahead the market is open for the long term,” he says. 

One concern over the ECFA is that it could allow Chinese companies to flood Taiwan's domestic market, but at present there are caps in place for Chinese investment in Taiwanese financial institutions. Many argue that despite the concern that Taiwanese banks could be overwhelmed by their larger Chinese counterparts, Taiwan has more to gain because the domestic market is overly competitive. Mr Kung of Fubon Financial says: “We are opening our unattractive market in exchange for a very attractive market.” 

Because of such issues in Taiwan's financial markets, it is argued that China’s banks would not want to invest heavily in Taiwan. Many argue that Chinese banks want to establish a presence only as a kind of flag-planting exercise, with Mr Kung saying that Chinese banks are more likely to make better use of their capital in other markets. 

Ms Fan of Taiwan Ratings says that Chinese banks have strategic goals in Taiwan. “We do not think they will expect a profit contribution from this market. They can take the opportunity to understand more about corporates’ relationship with Taiwanese banks and learn more about the consumer banking or wealth management strategy of the Taiwanese,” she says.  

The signing of the ECFA agreement was a milestone in the development of such opportunities. While the agreement opens up the Chinese market to Taiwanese banks, which are struggling in an overly competitive domestic market, the pace at which Taiwanese banks embrace the potential of China is expected to be cautious in the coming months. 

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