Pointing missiles at trade partners would seem to make for bad for business. But despite tensions bubbling up in the Taiwan Strait again this year, regulators on the island are moving ahead with plans to open up to further mainland investment.
A regulatory shift announced in April is set to take effect in roughly 40 days and will allow Industrial & Commercial Bank of China, the mainland’s biggest bank, to buy a 20% share in Taiwan’s Bank Sinopac. That deal, which marks a mainland banks’ first investment into a financial institution on the island, is “a breakthrough,” according to Chen Desheng, chief executive at the Cross-Straits Common Market Foundation, a non-profit that promotes ties between Taiwan and the mainland.
The policy change comes on the heels of another regulatory shift in February that allowed the people of Taiwan to open accounts in renminbi. Together, these moves to lighten financial restrictions have been hailed as some of the most substantial financial arrangements between Taiwan and the mainland in about 60 years.
China views Taiwan as a runaway province, although the island has been governed autonomously since the 1950s. While the two sides have at times appeared to be at the brink of war, political and economic relations have grown increasingly warm since current President Ma Ying-jeou assumed office in 2008.
Shortly after his election, the two sides signed the Economic Cooperation Framework Agreement, which allowed for the first mainland investment into Taiwan in generations and further opened the mainland to Taiwan investors. Steps toward further opening have gradually been rolled out since then.
While the deregulation has forged a path for Chinese investors, restrictions remain and investment is limited. Since mid-2009, mainland investment in Taiwan has totaled only US$642.7 million, according to the mainland’s Xinhua News Agency. The pace has accelerated so far this year, with first quarter investment rising 34% year-on-year to US$139 million.
The latest regulatory developments are no doubt a win for the mainland, which appears set on slowly coaxing the island closer to its shore. Still, the regulatory openings have been limited, some analysts said, and the window for further changes may close soon as Taiwan’s electoral cycle draws nearer.
Cooperating on deals like the one between ICBC and Sinopac “is just the first stage,” said Chen of the Cross-Straits Common Market Foundation, which had a direct dialogue on further cooperation with China’s new president Xi Jinping earlier this month. “I think investment like this will continue into the future.”
The deal will go beyond basic cooperation on business frameworks and should give both parties an opportunity to work together on developing financial expertise, Chen said.
It also represents a breakthrough for the people of Taiwan – whether they like it or not. People on the island have long been wary of any reach the mainland might have across the strait.
“Only two or three years ago, Taiwan’s people were very cautious about this kind of investment. The market here is slowly opening,” Chen said. “In the minds of the people of Taiwan, there is also a process of getting used to this.”
Taiwan’s limits on overseas investment are stricter for mainland entities than they are for other countries. The regulatory easing approved on April 1 only increased the share a mainland firm could own in a Taiwan holding company from 5% to 10%. For unlisted banking subsidiaries of holding companies, the mainland will be able to buy a 20% share, which is what will allow for the Sinopac deal.
No mainland entities invested in Taiwan’s banks under the old rules because the investment caps were reportedly too low. The new investment allowance isn’t as high as the mainland would have liked either, said Peter Sutton, head of research for CSLA Asia-Pacific Markets in Taiwan.
“What the mainland really wanted was 20% of the holding company, not 10,” he said. “I don’t really think they want to be a minority shareholder in an unlisted bank.”
If the bank deal hasn’t drawn the attention of Taiwan residents, the launch of renminbi bond issuances and deposits on the island earlier this year may have done just that. Taiwan’s central bank allowed 46 financial institutions to begin taking deposits or making remittances in renminbi on February 6. US$200-million worth of China’s yuan shot into retail accounts on the first day.
With about US$2.7 billion in yuan deposits on the island as of mid-March, liquidity in the offshore yuan market in Taiwan is low but set to climb by the end of the year. Several analysts projected that the island could overtake Singapore as the No. 2 market for offshore yuan trading by the end of the year.
Before too long, institutional investors in Taiwan should be able to reinvest their yuan into mainland securities as well. Mainland state media have quoted officials saying that China will give Renminbi Qualified Foreign Institutional Investor (RQFII) quotas to Taiwan financial institutions allowing them to invest up to RMB100 billion back into the mainland. Analysts expect this to boost demand for yuan on the island.
Still time to change
It’s not a surprise that regulatory changes are coming right now. Taiwan is in a political dead zone between elections that gives President Ma a milder political environment for enacting mainland-friendly policies. Ma was elected for a second term in office in January of last year.
This sweet spot won’t last long, however. In 2014, the country will have local elections before gearing up for the next presidential election. During presidential elections in Taiwan, the opposition throws pro-mainland sentiment in the face of the Kuomintang, the party which Ma leads. Such was the case in the last election. During politically sensitive times, cooperation with the Chinese government can take a hit as the party seeks to appeal to a wider base of support.
That said, more regulatory changes could be pushed through before election fever takes over the island. “There is still the rest of this year,” said Sutton at CSLA. “If it doesn’t get done this year it’s hard to see it getting done.”
Taiwan’s regulators should look to get more done during this time – but not too much. Although some mainland investors may argue that this month’s regulatory changes were too small, they will have to remember that only a decade ago the world was watching the straits for signs of war, and economic cooperation was out of the question. Businesses should celebrate that tensions are now near an all time low.
Regulatory changes will have to come in small doses in order not to spook Taiwan on a financial takeover, as opposed to a political one. And the people of Taiwan will need to see concrete, positive results of the mainland’s economic influence on the island, where many are still afraid that its bigger brother doesn’t have its best interests in mind.
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