Taiwanese banks will be able to accept Chinese yuan deposits and offer yuan loans in Taiwan from next month. This is very different from when the banks were given permission to offer the same services for the US dollar and the yen. Leaving aside things like culture, language, history and education that make Taiwan and China very similar, interest rates and interest spreads are two very important factors when it comes to this issue.
Both the US and Japan are more developed than Taiwan, but their interest rates are lower than those on the New Taiwan (NT) dollar. There is thus no real incentive for Taiwanese to convert NT dollars into US dollars for savings accounts.
The same cannot be said of the yuan. Although Taiwan is more developed than China, the Chinese market is much larger than Taiwan’s. The factor price equalization that has occurred as a result of cross-strait industrial integration over the past 12 years will spread into Taiwan’s financial sector once yuan services are offered here. The factor price equalization across the Taiwan Strait is a kind of center-periphery process that presses down domestic salaries and pushes up unemployment.
The current loan interest rate in China is somewhere between 5 percent and 6 percent. If banks in Taiwan set deposit rates on the yuan to between 2 percent and 3 percent, the huge differences in the interest spread for loan and deposit services for the yuan compared to other currencies will mean that banks will place a higher priority on loan and deposit services for the yuan.
Even if the government limits the amount of NT dollars that can be exchanged each day, banks will work hard to promote yuan services, which are likely to completely overtake US dollars services and those of other currencies. Small and medium enterprises will be affected the most because the willingness of banks to lend money to such enterprises will drop and credit requirements are certain to become stricter.
Why would small and medium enterprises want to borrow yuan? The Chinese currency is still not an international currency and it is used within China for things like financing Chinese subsidiaries, new investments or real-estate purchases. While it will not move money directly out of Taiwan over to China, in reality, the process involved is no different from Taiwanese investments in China, nor is it all that different from Taiwanese businesses closing down their domestic production lines and moving their technology and funds to China.
The only difference is that this time around, we will see movement in Taiwan’s financial sector instead of in the corporate sector and we really cannot afford to overlook the negative impact this will have on Taiwan’s economic growth.
The government may argue that this is different to Taiwanese businesses moving their operations to China because funds from China will flow into Taiwan as a result of these new financial services. Although Chinese investment in Taiwan has been allowed for quite a few years now, what flows into Taiwan has been disproportionate to what flows to China. Even more worrying is that what flows from Taiwan into China are productive funds and financing, whereas Chinese investments in Taiwan are non-productive funds that are not helpful in improving Taiwanese industries and increasing employment, such as investments in the Taiwanese stock market and buyouts in industries such as media and distribution.
The recent inking of the agreement with the People’s Bank of China to build a yuan-clearing mechanism in Taiwan will be highly advantageous for banks, as pro-China academic and media outlets have stressed, but for the nation and its small and medium enterprises, it will be a huge disadvantage.
Huang Tien-lin is a former presidential adviser.
Translated by Drew Cameron