Taiwan's rising prominence as an offshore renminbi centre reached a milestone earlier this year when the Bank of China opened a clearing bank in Taipei. But with Hong Kong, and to a lesser extent London and Singapore, already working as offshore renminbi hubs, where will Taiwan fit in?

Taiwan is making a concerted effort to become a major offshore renminbi centre, with transactions in the Chinese currency being driven by Taiwan’s trading relationship with mainland China. 

Hong Kong remains the clear leader in the offshore renminbi market, and while other markets – such as the UK, Singapore and Australia – are being added to the renminbi's internationalisation project, Taiwan in many ways is a natural choice in the next stage of liberalising China’s currency. 

Bank of China opening

In February 2013, the Taipei branch of the Bank of China was appointed as the clearing bank for renminbi transactions in Taiwan. Once the clearing bank was set up, 46 domestic and offshore banking units in Taiwan opened accounts with Bank of China (Taipei) so they could be connected to the renminbi payment infrastructure. Payments began on February 6 and since then the renminbi pool in Taiwan has been steadily growing. 

Linan Liu, Deutsche Bank’s rates strategist for Greater China, says that although the Taiwanese market is still in its early stages of development, it has a promising future.  “The pace of deposit growth has been quite encouraging,” she adds. 

Tiecheng Yang, a partner at law firm Clifford Chance's Beijing office, says, “According to some local reports, initial appetite [in Taiwan] for renminbi was very big, with more than Rmb1.3bn ($209 million) going into retail accounts on the first day. Some reports say the island’s renminbi deposits are expected to reach Rmb250bn to Rmb300bn in the next two to three years, an important new pool of liquidity at a time when renminbi deposit growth in Hong Kong has stalled.” 

Trade corridor

This liquidity, explains Larry Hsu, head of Chinatrust Commercial Bank’s global capital markets group, has largely come from the Bank of China (Taipei) out of the Rmb20,000 that is allowed to be converted every day by Taiwanese nationals. The rest has come from the proceeds of Taiwan's trade with China. 

According to figures from international payment network Swift, cross-border renminbi payments made by Taiwan grew by 120% over six months prior to March 2013. Swift states that nearly 44% of payments between Taiwan and China (including Hong Kong) are now made in renminbi. 

Unlike other offshore renminbi financial centres, Taiwan enjoys the benefits of a strong trading relationship with China, which has been boosted in recent years by increased cross-Taiwan Strait economic co-operation. According to research from French corporate and investment bank Natixis, total direct trade between Taiwan and mainland China grew from $11bn in 2001 to more than $120bn in 2012. 

Victor Kung, president at Taipei-based Fubon Financial, says that it is the trade surplus with China that makes the renminbi market in Taiwan unique. “The large trade surplus in renminbi creates a natural outflow into the offshore market and increases the size of the offshore renminbi pool,” he adds.

Fresh opportunities

For local Taiwanese banks, which are operating in an overbanked market with squeezed margins, the opening up of the renminbi market gives them a new revenue stream. “The internationalisation of the renminbi in Taiwan creates tremendous business opportunities for Taiwanese banks,” says Mr Hsu at Chinatrust. 

Mr Kung says that for institutions such as Fubon, the opportunities are in capitalising on the trade that already exists between China, Hong Kong and Taiwan. He explains that a typical Taiwanese company may receive orders from the US, Europe or south-east Asia. The company’s subsidiary in China would manufacture goods on the mainland, and the final goods would be shipped out of Hong Kong. For such companies, Mr Kung says: “We Taiwanese banks are their main bankers and we know intimately how money flows between these three places. We think we are in the best position in helping this three-way international trade in offshore renminbi.”  

Mr Hsu says: “Taiwanese banks can generate business opportunities from these trade flows and derived exposure management opportunities. Taiwan and China have the same origin in their culture and language – it is much easier for the Taiwanese banks to service both China and Taiwanese clients on these offshore renminbi opportunities.” 

Hong Kong's role

Because Hong Kong was the first financial centre to go live with offshore renminbi business, many Taiwanese companies have been doing renminbi transactions out of Hong Kong. 

Lisa O’Connor, renminbi director at Swift, says that Hong Kong is likely to continue as a hub for international offshore transactions, but Taiwan is more likely to serve domestic businesses and their associated trade payments. 

Now that Taiwan has its own clearing bank and its renminbi business is beginning to take off, it is possible that there will be consequences for those operating in the Hong Kong market. “Regional treasury centres for Taiwan companies have been based in Hong Kong – some of those transactions might move back home,” says Ms O’Connor. 

It is not just settling trade payments that Taiwanese companies are doing in renminbi, they are also able to issue renminbi bonds in their home market. In the same month as the clearing bank went live, the first renminbi Formosa bond – Taiwan’s equivalent of Hong Kong’s dimsum bond – was launched. Chinatrust Commercial Bank was the first Taiwanese company to issue a renminbi Formosa bond, with a Rmb1bn three-year issue at 2.9%. 

When comparing the Taiwan bond market to Hong Kong's, Ms Liu says: “There is relatively strong renminbi liquidity chasing low issuance in Taiwan, which is pushing the yield quite low.” She adds that the Taiwan market has historically had strong domestic liquidity in the insurance, pension and bank sectors.

“The market supply is too small to accommodate the demand for assets,” adds Ms Liu, who says that approximately 10% of financial sector assets in Taiwan are held in a foreign currency. “There is a very strong desire for diversification by adding renminbi-denominated assets to the asset allocation.”   

Such factors mean that renminbi products will be well received in Taiwan. Mr Hsu at Chinatrust says: “We expect the Taiwan RMB Formosa bond market to be very competitive with the Hong Kong dimsum market. With the opening up of the renminbi for domestic clients in Taiwan and the active accumulation of renminbi, the introduction of renminbi in Taiwan will bring alternative investment opportunities for the general investment community in Taiwan. Taiwan has one of the largest investing pools in the region, and renminbi Formosa bonds are attractive to this vast investor base which is in need of renminbi investment opportunities.”

CNH and CNT

There has been speculation that the creation of an offshore liquidity pool in Taiwan, which is given the currency code CNT, could dilute the pool of offshore renminbi in Hong Kong, which is known as CNH. 

Mr Yang at Clifford Chance says: “A CNT pool in Taiwan will inevitably affect the liquidity of the CNH pool in Hong Kong. As Taiwan and Hong Kong are quite similar in renminbi settlement arrangements, many Taiwanese investors will choose to deposit renminbi in Taiwanese banks and not Hong Kong banks. This amount is estimated to be about Rmb400bn to Rmb500bn, counting for one-half of the total renminbi deposits as of the end of 2013. In addition, with the development of other investible products, Taiwan will go even further on the road to becoming another offshore renminbi centre, which will put more pressure on Hong Kong.”

There has also been discussion that the creation of a separate CNT currency code for Taiwan will mean that the overall liquidity pool is being diluted into separate puddles of offshore renminbi, each with their separate code. The creation of different codes originates from the foreign-exchange market because the onshore renminbi (CNY) and offshore (CNH) would be trading at different rates. 

When it comes to the new market in Taiwan, Ms Liu explains that the level of CNT should be determined by the supply and demand of domestic investors, and so there is a chance the CNT pricing will be different from CNH. “There is the potential for pricing dislocation, given that the local regulations are different in Hong Kong and Taiwan,” she says. “These two markets are roughly fungible – liquidity can flow without restriction between the two markets.” Ms O’Connor agrees on this point, adding that effectively there is one large pool of offshore renminbi. 

Good neighbours?

In terms of the other financial centres that are part of the renminbi's internationalisation process, Taiwan is perhaps not quite as significant as the likes of London and Singapore. However, the country has a unique relationship with China, which could give it some advantages. The liberalising of the renminbi is also a political process, and some observers believe that Taiwan may be treated more favourably than other offshore renminbi centres by the Chinese authorities. 

The creation of the offshore renminbi market comes in the context of increased co-operation between Taiwan and mainland China. And while there have been business opportunities for Taiwanese banks, fears have been expressed that Chinese banks could flood and dominate the Taiwanese market, and also that Taiwan could ultimately have its sovereignty threatened. 

Yu Yongding, director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, says: “I think Taiwanese people are very enthusiastic about renminbi internationalisation – their thinking is the same as businesspeople in Hong Kong. What applies in Hong Kong more or less applies to Taiwan, but the one difference is politics. The Taiwanese administration [has many concerns over] renminbi internationalisation. I do not think renminbi internationalisation will make significant headway in Taiwan, not because of economic reasons but because of political reasons.” 

Such scepticism is not shared by Taiwanese bankers such as Mr Kung at Fubon. He says that China granting Taiwan a clearing bank was not a favour, because the move is also beneficial to China in building offshore renminbi liquidity. “We can dismiss the conspiracy theory that China is giving candy with poison inside – we do not need to worry about that because it is beneficial to the Chinese as well,” he says. 

Mr Yang at Clifford Chance says: “Aside from adding a fresh source of renminbi liquidity, the move to make Taiwan the second offshore renminbi financial centre is part of a much broader effort by Taiwan's government and the [Chinese] government to stabilise relations and deepen economic ties following decades of political dispute. Therefore, how to maintain stable and sustainable cross-strait relations – political and economic – will become a vital challenge for Taiwan.”

Hurdles remain

Politics is just one of the challenges Taiwan faces as it builds its offshore renminbi financial centre, though others remain in places that are preventing Taiwan from developing the same level of maturity as the Hong Kong market. 

Observers point to the restrictions that are still in place in Taiwan. For example, China-based companies are unable to issue renminbi Formosa bonds. “Should China-based companies be allowed to issue renminbi Formosa bonds, it will greatly enhance the offshore renminbi liquidity usage in Taiwan,” says Mr Hsu.

Also, the Renminbi Qualified Foreign Institutional Investor (RQFII) scheme, which allows offshore renminbi to be invested in China, has not been opened to Taiwanese investors. In January 2013, the China Securities Regulatory Commission signalled that it would open up quotas to Taiwanese investors, but at the time of writing this had not been formalised. 

Ms O’Connor points out that a currency swap agreement would increase the use of the renminbi. Mr Hsu agrees, saying: “We need to have the swap agreement between central banks to ensure this offshore renminbi is fully secured by its lender of last resort. We need to obtain the intra-day overdraft financing limit from China on renminbi settlement to ensure its liquidity integrity.” 

Despite these challenges, there is still enthusiasm about the potential of the Taiwanese renminbi market, and how this could boost the domestic banks. Mr Hsu says: “In our view, challenge means opportunities, and we should see this opening of the offshore renminbi in Taiwan as a stepping stone for us to compete in the international arena” 

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