China’s launch of a free-trade zone (FTZ) in Shanghai on Sunday is expected to benefit Taiwanese financial institutions and help lift their overall yield in the long run, UBS Securities said yesterday.
New measures within the experimental zone target financial reform, potentially boosting Taiwanese banks’ yuan businesses and allowing insurers to further diversify their foreign asset mix once they are granted licenses to participate in the zone, UBS Securities analyst Kelvin Chu (朱曉暐) said in a note.
Based on the details for the zone that China’s State Council announced in a statement on Friday, the Shanghai FTZ will allow capital account convertibility for yuan, interest rate liberalization, and cross-border financing and offshore businesses, on the condition that risk is under control.
“Although Taiwan’s financial companies are not among the first batch to be involved in the FTZ, we think this is positive for the financial sector in the longer run, especially on potential developments on cross-border renminbi [yuan] flows,” Chu said in the note.
Chu said more yuan deployment channels could mean higher asset yields and better profitability for Taiwanese banks’ yuan businesses, while the Shanghai FTZ might allow these banks to penetrate China’s yuan market more directly and quickly, leveraging their current offshore banking units.
For insurers, the relaxation on sales of accident and health insurance products within the zone would enable them to diversify product offerings in their China operations, while any improvement for yuan investment channels should help insurers to better structure their yuan-based policies in Taiwan, Chu said.
Shanghai FTZ executive deputy director Dai Haibo (戴海渤) said on Monday in Shanghai that companies and financial institutions within the zone would be allowed to invest in Shanghai securities and futures markets, while qualified overseas individuals in the zone may open accounts to trade local securities.
Overseas parents of companies registered in the zone will also be able to issue yuan-denominated bonds in China, Dai said.
However, economists say they still have not seen implementation rules set by the zone, indicating that many issues are still under discussion and more measures may come out in the next few months.
“For instance, the negative list has not been announced at this moment. Also, it is very vague on how to accelerate the financial reform within the FTZ and at the same time to establish a firewall between the FTZ and the rest of mainland China,” JPMorgan Chase & Co chief China economist Zhu Haibin (朱海濱) said in a separate note over the weekend.
However, Zhu said the zone’s official launch still marks the start of full-scale reform within the zone.
Yuanta Securities Corp (元大證券) believes uncertainty will remain for Taiwanese financial firms in the short term, saying that banks will need more details, such as whether yuan-based funds can flow out of the FTZ, before they can make a comprehensive assessment and plan their next move.
“We see limited upside for Taiwanese companies from the China free-trade zone in Shanghai, as few incentives are offered within the zone to foreign companies including Taiwanese names,” Yuanta analysts led by Vincent Chen (陳豊丰) said in a note yesterday. “The most obvious effects of the FTZ are the surging property prices in the region.”