After many years of waiting, the gap between Taiwanese investment into China and the absence of Taiwan's banks on the mainland has narrowed.
Following years of political deadlock, the door was opened in November 2009 with the signing of bilateral memorandums of understanding between Taiwanese and Chinese financial regulators, which paved the way for supervision in the banking, insurance and securities sectors.
There was further progression on June 29 last year after representatives from the two governments signed the cross-strait Economic Co-operation Framework Agreement in Chongqing, China. The deal aims to remove tariffs and provide easier market access between the two countries.
As of December 16, Taiwan's Financial Supervisory Commission (FSC) had approved seven Taiwanese banks to set up branches in China, namely First Bank, the Land Bank of Taiwan, Cathay United Bank and Chinatrust Commercial Bank in Shanghai, the Taiwan Cooperative Bank in Suzhou, the Chang Hwa Commercial Bank in Kunshan, and the Hua Nan Commercial Bank in Shenzhen.
With the exception of Hua Nan and Chinatrust, all of the above opened their branches in late December.
In addition, the FSC has approved applications by the Bank of China, the Bank of Communications and the China Merchants Bank to set up representative offices in Taiwan. The Bank of Communications opened its Taipei representative office on September 24 last year, followed by the Bank of China in a low-profile ceremony on October 25.
Pull factors
There are more than 100,000 Taiwan-invested firms in China, and it is these companies that the Taiwanese banks will be targeting. This will make the Pearl River Delta in southern China's Guangdong Province, the major metropolis of Shanghai and its surrounding province of Jiangsu, and the cities of Kunshan and Suzhou key areas for the banks due to the concentration of Taiwanese companies in these regions.
"Mainland China is not only the world's biggest workshop but is now a fast-growing market," says Land Bank of Taiwan president Su Ler-ming, who adds, "If we do not go into mainland China, we will not be able to support our clients."
Mr Su says: "Most small and medium-sized Taiwan-invested manufacturers in mainland China have a tough time in securing financing from China's state banks and hope very much that Taiwanese banks can set up branches and help them. This is where our best opportunities lie."
Taiwan's bank executives are also motivated by a strong push factor; namely narrowing profitability in the slowly expanding domestic financial services market.
Taiwan's banking market has been held back by intensive price competition, which is saturated with 37 domestic banks with more than 3300 branches, as well as an additional 98 branches belonging to 29 foreign banks. On top of this, the expansionary monetary policy adopted by Taiwan's central bank over the past few years has held interest spreads to about one percentage point, far lower than the two to three percentage point margins that are common in China.
When it comes to location, Taiwanese banks have one important rule for their new Chinese branches; they tend to follow their existing clients that have invested on the mainland.
The state-owned Land Bank of Taiwan decided to establish its first operation in Shanghai, given the giant Chinese metropolis's economic clout and potential as a regional financial centre. However, it is already exploring the prospects of opening branches from Qingdao to the Haixi Development Zone in Fujian, just across from Taiwan, and even inland into Sichuan Province.
Mr Su says the state-owned bank's newly opened Shanghai branch will be initially limited to corporate finance, trade financing, remittances and short-term revolving credit for its Taiwanese business clients due to the branch's limited starting capital of about Rmb400m ($60.6m).
"Initially, most of our clients will be Taiwanese businesses which are long-term customers of our mother bank – those clients we understand very well," says Mr Su.
"The Chinese state banks have the advantage of size, but we are more nimble, as state-owned banks in Taiwan have already had to change and improve flexibility in the wake of competition from private banks," adds Mr Su.
"We are now accessing other cities with high potential for a second branch and we are also assessing the green channel option," continues Mr Su, referring to Beijing's promise of faster application approval and other favourable conditions for Taiwanese banks willing to open branches in China's western, central and north-eastern zones.
Strategic locations
Meanwhile, the president of state-owned Taiwan Co-operative Bank, Tsai Chiu-jung, says its newly opened branch in Suzhou in Jiangsu Province will enjoy a competitive edge in trade finance and remittances with expatriate Taiwanese clients thanks to its dominant domestic position. In Taiwan, it has 299 branches, 110 more than its closest competitor, First Bank.
Mr Tsai notes that Taiwan Co-operative Bank, which has already signed memorandums of understanding on co-operation with the Bank of China and the Farmers Bank of China, is also aiming to engage in syndications with foreign and Chinese banks.
Chang Hua Bank set up its representative office in Kunshan City in China's Jiangsu Province eight years ago, and has now opened its first branch there too. It opted for the location due to its concentration of more than 4000 Taiwanese firms and approximately 100,000 Taiwanese managers and staff, as well as their dependants.
A ready market
Chang Hua Bank president William Lin says its staff in the former representative office have accumulated personal contacts with more than 3000 client files to give the new branch a running start. He says the partially state-owned bank is aiming to set up "sub-branches" elsewhere in Jiangsu and is considering sites such as Suzhou, Hangzhou or the Hongqiao Development Zone adjacent to Shanghai.
"Simply working with our existing Taiwanese business clients will provide years of business opportunities," says Mr Lin, who adds that the Chang Hua Bank would rely on its "special expertise in financing with small and medium-sized enterprises which mainland China needs".
However, Mr Lin notes that "the risk of lending to mainland Chinese enterprises will be much higher and we will need to intensify credit investigation". Any single loan of $2m or more would have to be approved by the bank's headquarters in Taiwan.
Mr Lin also observes that "the spread on loans in China is at least 2.5 percentage points" compared with about 1.2 percentage points in Taiwan. He hopes that Taiwanese banks will not engage in "cut-throat price competition" for Taiwanese business clients in the Chinese market.
Mr Lin says FSC regulations limit the total volume of loans extended by any branch set up by a Taiwanese bank in mainland China to no more than twice the sum of its total deposits and the net amount of funds it is able to secure in the Chinese interbank market, a sum which itself is restricted to twice the branch's initial capital.
At present, FSC rules require a minimum Rmb200m as initial capital but do not impose a ceiling.
"The FSC rule will cap the Chang Hua Bank's initial lending fund to about $200m and put a ceiling of $5m for loans to any individual client," says Mr Lin. He adds that he hopes the FSC will relax this rule.
Fast start
Cathay Union Bank president Chen Tsu-pei says the priority of the bank's first branch in Shanghai was to "definitely make money in our first year because only then will we be able to apply to begin renminbi business in our second year."
Mr Chen says the Cathay Union Bank branch, the only one of the first five to be set up by a privately owned Taiwanese group, will initially focus on foreign exchange deposits, loans, remittances and trade finance as well as participating in syndications and other specialised financial services between the Taiwanese, Chinese and Hong Kong markets.
Cathay Union Bank's branch may hold an advantage over its Taiwanese peers as the Cathay Financial Group's life insurance unit is already active in nine Chinese provinces and cities, and its property insurance firm is present in two provinces.
"Our branches can go where Cathay Life Insurance and Cathay Century Insurance have already started operating and thus allow us to display a double-track integrated business effect at once," says Mr Chen.
Risk will be minimised by initially relying on well-known clients and the requirement that all loans issued by the Shanghai branch receive advance approval from Cathay Union Bank headquarters in Taiwan.
Getting in on the action
Other Taiwanese banks are getting in line to launch in China. "China is both an opportunity and a challenge," says Bank of Taiwan president Chang Ming-daw. Taiwan's largest financial institution, which is fully state-owned will open a representative office in Shanghai this month and is aiming to upgrade it to a branch in 2012.
"We need to be very careful, but we also must remain close to our clients or else we will not fully understand their situations and our risk will actually rise," says Mr Chang.
"We will select as our clients Taiwan businesses that are already our customers, and we will gradually have more interaction and get more information on operating in the mainland Chinese market to help us better manage risks."
In February 2010, E Sun Bank obtained permission from the China Banking Regulatory Commission to set up a representative office in Dongguan City, Guangdong Province, a main centre for Taiwanese manufacturers. The bank is aiming to upgrade to a branch in the second half of 2011, according to E Sun Financial Holding Company president Joseph Huang.
"We chose Dongguan because there are about 5000 Taiwanese companies [in the city], mostly small enterprises, and because lending to small businesses is one of our special strengths," says Mr Huang.
"We will first work to understand the needs of our clients and the regulatory environment. Then we will adapt our product line with suitable modifications, especially products in which we are very competitive, such as credit cards and housing loans," adds Mr Huang.
Taishin Holdings CEO Greg Gibb, whose firm aims to set up a representative office in Nanjing, Jiangsu Province, cautions that "it is not going to be enough for Taiwanese banks to just follow their clients".
"In the future, Taiwanese banks in China will need to compete where they have a skill advantage and snare niches not served well by Chinese state-owned banks," says Mr Gibb.
Challenges ahead
However, expanding out of the Taiwanese business circles into the broader Chinese market may be difficult, warns Yuanta Financial Holding Company chairman Yen Ching-chang, who says his firm is applying to convert its Hong Kong representative office into a branch and would adopt a "reality-based stance" towards the Chinese market.
"The combined market share of the 46 major foreign players in the Chinese financial market is only 2%," says Mr Yen, who advises Taiwanese banks not to rely upon receiving special treatment over other foreign banks in China.
"If China provides the same treatment for Taiwan's commercial banks as it does for other foreign banks, they will have to struggle very hard to compete with the other foreign banks for pieces of that 2%, and any preferential treatment for Taiwanese banks may be challenged by other World Trade Organisation members," warns Mr Yen, who is Taiwan's first ambassador to the Geneva-based body.
Mr Yen adds: "Securities trading would be a good market for Yuanta to enter into in the Chinese mainland," especially since Yuanta Securities has a competitive edge as the top securities trading firm in Taiwan.
"We have already been approached by some Chinese securities firms to discuss various forms of co-operation," he says.
Another risk acknowledged by all executives was the unstable Chinese legal environment and the differences between central and provincial rules.
Chang Hua Bank's Mr Lin says hiring a Chinese "compliance officer" to track such legal changes "is expensive, but necessary".
E Sun Financial Holding Company's Mr Huang notes that the biggest risk in the Chinese market for a Taiwanese bank lies in the apparent similarity in language and culture. He says: "Many people believe the myth of a common ethnicity, language and culture, but in fact China is a very different place and should be recognised as such."
