Yuan liberalization welcomed

Taiwanese businesses in China yesterday welcomed the government's move to allow offshore banking units (OBUs) of Taiwanese banks to conduct yuan transactions and urged more liberalization on cross-strait banking in the near future.

The Bureau of Monetary Affairs on Wednesday announced its decision to allow local lenders' OBUs to engage in non-delivery forwards (NDF) and non-delivery options (NDO) between the yuan and the US dollar.

The move, which takes immediate effect, allows Taiwanese companies operating in China to hedge their currency risks, the bureau said in a statement.

Forwards are agreements in which assets are traded at fixed prices for delivery later. Yuan forwards are "non-deliverable" because they are settled in dollars, not the yuan.

"We welcome the government's permission because it will help us offset possible yuan revaluation risks," said Tony Cheng (鄭榮文), chairman of Taiwan Merchant Association Shenzhen (深圳台商協會).

The yuan has been fixed in a band around 8.2770 to the US dollar for the past eight years. But in view of China's huge trade surplus and increasing capital inflows in recent years, the Chinese currency has been under growing international pressure to abandon the peg or widen the band, which implies that it may have room to appreciate against the greenback in the future.

While many China-based Taiwanese companies currently rely on Chinese banks to deal with currency transactions, Cheng said they will turn to Taiwanese banks, "because Taiwan banks are generally more flexible than their Chinese counterparts."

Financial institutions that intend to undertake the business need to secure approval from the authorities in advance, the bureau said.

To date, ABN AMRO Bank and Citibank NA have sent applications for permission. Chinese-language newspapers have reported that several local banks are also interested in applying for the business, including Shanghai Commercial & Savings Bank Ltd (上海銀行), Chang Hwa Bank (彰化銀行) and Hua Nan Bank (華南銀行).

As some Taiwanese companies have already engaged in yuan currency transactions with overseas banks, Cheng said he hopes the government will loosen restrictions on direct currency exchange between the yuan and the New Taiwan dollar.

The government still bans forex exchanges between the NT dollar and the yuan.

"We always need to go through multiple currency exchanges before we can get the yuan," Cheng said. "It's not only troublesome, but also causes interest losses amid forex exchanges."

One accounting specialist agreed with Cheng, saying direct forex exchange is needed as Taiwanese investment in China is increasing.

"The openness of direct forex exchanges will not only bring benefits to business people, it will also improve currency transaction by discouraging transactions in the black market," said Liang Tsai-tien (梁再添), an cross-strait accountant at Diwan, Ernst & Young (致遠事務所) in Taipei.

Taiwanese companies' investment in China rose 31 percent to US$2 billion in the first half of the year from the same period last year, according to statistics of the Investment Commission.