The fledgling yuan business in Taiwan will not affect Hong Kong’s position as offshore yuan hub in the region because its market is more mature and enjoys greater regulatory flexibility, DBS Bank said in a recent report.
The Singaporean bank is confident about the fast build-up of the yuan liquidity pool in Taiwan, which could reach up to 140 billion yuan (US$22.4 billion) early next year, accounting for 2 percent of Taiwanese deposits, the report said.
Taiwan’s trade surplus with China, yuan deposits currently held by Taiwan’s offshore banking units and the transfer of yuan deposits kept by Taiwanese firms in Hong Kong would supply the growth momentum, DBS said.
“We do not expect the recent development to have much impact on Hong Kong, which handles more than 80 percent of all yuan payments and receives more than 50 percent of all letters of credit sent by banks in China,” thanks to its position as a key entrepot of China, DBS said.
Given that the yuan is fungible offshore, the emergence of new offshore centers — Taiwan and Singapore — simply expands the existing regime instead of creating competing systems, DBS said.
Further, legal restrictions need to be eased before Taiwan can have a thriving yuan-denominated bond market, DBS said.
At present, listing on the international board of local bourses requires a “BBB” credit rating or higher, and Chinese enterprises and financial institutions are prohibited from issuing debt in Taiwan.
These hurdles stall market development as Chinese names are the majority of issuers of dim sum bonds in Hong Kong and most of them are unrated, DBS said.
A constrained yuan-based bond market will slow yuan business development in other sectors such as banks, asset funds and insurance companies since they are the traditional bond buyers based on Hong Kong’s experience, DBS added.
Meanwhile, Hong Kong has loosened regulations to boost its competitiveness by liberalizing banks’ net open positions and statutory requirements several times last year among other measures, DBS said.