The May 20 inauguration of Taiwan’s new Chinese Nationalist Party (Kuomintang or KMT) government under president Ma Ying-jeou quickly led to the resumption of semi-official cross-strait discussions between Taipei and Beijing.
After a decade-long suspension, negotiators for Taipei’s ‘white glove’ Strait Exchange Foundation (SEF) and Beijing’s counterpart Association for Relations Across the Taiwan Strait (ARATS) inked quasi-official agreements to initiate direct weekend cross-strait passenger charter flights and to open Taiwan to 3000 Chinese tourists a day.
Although characterised by various commentators as either “a major breakthrough” and “a big step closer” or as “overly hasty and careless”, the resumption of contacts between the quasi-official agencies and intensive dialogue between Taiwan’s ruling KMT and the People’s Republic of China’s (PRC) ruling Chinese Communist Party also signalled a new environment favourable for progress on a long-awaited bilateral financial services ‘memorandum of understanding’ (MOU), which would allow Taiwan and PRC banks to be able to directly enter each others’ markets under an authorised financial supervisory system.
Although the subject of discussion for years, political differences between Taipei and Beijing had blocked progress. In late December 2007, Chiou I-jen, then vice premier of the Taiwan’s Democratic Progressive Party, had told reporters that the PRC side had demanded that any accord on cross-strait tourism or financial supervision refer to the Taiwan side as “Taiwan, China”, which the vice premier said “we cannot possibly accept”, and had also demanded that “only the People’s Bank of China could be considered the ‘central bank’ since, in their view, Taiwan does not have a central bank”.
However, the agreement allowing Chinese tourists to enter Taiwan signed by SEF chairman Chiang Pin-kun and ARATS chairman Chen Yunlin in Beijing on June 13 referred to as “the two sides of the Taiwan Strait” or “the mainland” and “Taiwan”, indicating that former political barriers had been lowered.
Future opportunities
Moreover, Financial Supervisory Commission (FSC) chairman Hu Sheng-cheng says that Beijing had agreed that a MOU can be discussed through the SEF/ARATS channel and describes the consensus as “a step forward”.
FSC deputy chairman and spokesperson Chang Hsiu-lien said that although financial services were not on the agenda for the first SEF-ARATS session in Beijing on June 12 and 13, “there will be many opportunities in the future”.
Ms Chang’s statement was confirmed by Mainland Affairs Council chairperson Lai Shin-yuan, who stated on June 10 that questions of allowing PRC banks to set up offices in Taiwan and Taiwan banks to directly invest or set up branches in the PRC will be placed on the priority policy agenda for cross-strait consultations.
Ms Chang related that Taiwan was willing to find a way to effect authorised banking supervision without signing an official MOU, but said that Beijing’s China Banking Regulatory Commission “insisted on signing an MOU”, which, in order to avoid the problem of sovereign names, can be negotiated and signed through SEF and ARATS.
Ms Chang said the MOU would discuss issues such as finding a way to allow official regulators from both sides to engage in supervision and procedures for three types of market entry, namely upgrading representative offices into branches, direct investment or indirect investment through third locations.
The FSC spokeswoman added that bilateral talks on an MOU would inevitably also cover the issues of the entry of PRC banks and security investment firms into the Taiwan market, and added that the FSC is already prepared to permit PRC banks to establish representative offices in Taiwan that, after a suitable period, would be allowed to upgrade into branches.
Dollar exchange
At present, the FSC requires that foreign banks that want to set up representative offices in Taiwan must be listed in The Banker’s Top 1000, and banks that want to establish branches in Taiwan must be in the top 500.
Ms Chang also related that the FSC is considering allowing the PRC’s China Unionpay card to be used in Taiwan by incoming Chinese tourists, perhaps as early as August, in addition to plans to allow limited exchange of renminbi and new Taiwan dollars after an authorising revision to the Statute on Relations Between the People of the Taiwan Area and the Mainland Area was approved by Taiwan’s national legislature on June 13.
If an MOU is signed, the immediate beneficiaries will be the seven Taiwan banks that already have representative offices in the PRC, including Changhwa Commercial Bank, Hua Nan Commercial Bank, Chinatrust Commercial Bank, Cathay United Bank, First Commercial
Bank and the Land Bank of Taiwan, while Mega Bank and E Sun Bank have applications for representative offices pending.
However, in the meantime, Fubon Financial became the first of Taiwan’s 15 financial holding companies to officially enter the PRC retail market with a 19.99% equity investment in the Xiamen Commercial Bank (see box).
E Sun Bank chief strategy officer Joseph Huang says that the possibility of other Taiwan banks following Fubon’s example are “very low” because the cost of purchasing a fully licensed Hong Kong bank is now “prohibitive” for Taiwan’s financial holding companies.
Mr Huang says that most Taiwan banks would instead prefer to upgrade representative offices into branches, “but for this route we need the MOU to be negotiated”.
“In order to liberalise direct investment by Taiwan financial holding companies into China’s finance sector it will be necessary first to revise the statute on cross-strait relations,” says Mr Huang, who adds that most Taiwan financial holding companies or banks did not possess subsidiaries abroad from which to carry out indirect investment projects.
Taiwan’s edge
According to Liang Kuo-yuan, president of the research institute of Taiwan’s Polaris Financial Group, Taiwan banks have relative strengths in language and culture and links with the mother companies of Taiwan businesses compared with other foreign banks. He adds that, compared with PRC counterparts, they have more sophisticated risk management and information systems as well as more mature and diverse financial products and, through Taiwan’s financial holding companies, greater experience in integrated marketing of multiple financial products.
Regarding the prospects for equity investment into existing Taiwan financial institutions by PRC state-owned banks, Mr Liang comments that “while the DPP government prefers not to have any contact, the KMT government is correct in its attitude that financial interaction with China is inevitable but needs to pay more attention to the second phase issues of what should be liberalised and how”.
Mr Huang adds that the prospects for PRC banks to develop operations in Taiwan would be difficult. “The banking and financial market here is very competitive, with many world-class foreign banks who have already entered the retail market, but it is likely that the entry of PRC state banks into our market will have greater political than commercial meaning.”
FUBON TAKES THE FIRST STEP INTO CHINA
Fubon Financial became the first major Taiwan bank to take a direct stake in the banking market of the People’s Republic of China in June through a direct 20% investment in a domestic Chinese commercial bank in Xiamen, a port city in Fujian province opposite Taiwan’s Kinmen Island and a favoured site for thousands of Taiwan businesses.
The door for Fubon’s foray in indirect equity investment was opened by the outgoing Democratic Progressive Party cabinet, which approved March 12 proposals by the Financial Supervisory Commission to allow Taiwan banks to purchase as much as a 20% stake in PRC banks through third-country subsidiaries and to ease restrictions on Taiwan-based offshore branches that will allow them to accept accounts receivable transactions in the PRC.
Based on the liberalisation, Fubon Bank (Hong Kong) Ltd announced on June 11 that it will pay Rmb230m ($33.2m) for a 19.99% share in Xiamen Commercial Bank, which is ranked fifth among commercial banks in the Fujian port city with 32 branches and total revenues of Rmb595 million in 2007.
Fubon Financial had Taiwan’s best performing financial holding company last year with net earnings of NTw$135.1bn ($4.4bn), had laid the groundwork for the move in September 2003 by purchasing a 55% stake in Hong Kong’s International Bank of Asia (the former Sun Hung Kai Finance Company) and later turning IBA into a fully owned and fully licensed bank incorporated in the Hong Kong Special Administrative Region as the Fubon Bank (Hong Kong).
Thanks to its status as a licensed Hong Kong bank, Fubon Bank (HK) was able to take advantage of Hong Kong’s Closer Economic Partnership Arrangement with the PRC, which allows a Hong Kong bank to acquire a shareholding in a mainland bank so long as it has at least $6bn in total assets in the preceding year instead of the usual requirement of $10bn.
Fubon will gain three of the 11 seats on the bank’s board and will also gain the right to appoint the Xiamen-based institution’s general manager, who is expected to be Taipei Fubon Bank consumer finance general manager Kao Chao-yang.
If the deal is approved by Beijing’s CBRC, a process which is expected to take about two months, Fubon will become the first Taiwan financial holding company to gain an official foothold in the PRC retail banking market in a port that hosts more than 3000 Taiwan firms and over 2000 Hong Kong companies.
