Taiwan and China made a breakthrough last week in pushing for the opening up of securities markets, paving the way for local securities brokerages to expand their business into China. The focus is almost all on Beijing’s agreement to ease investment restrictions on local securities companies.
This progress sends an encouraging message to the local financial sector. However, before more plans are announced, investors should be cautious because insufficient financial disclosure by listed Chinese companies has been a long-term problem in China. Most cross-strait agreements that have been made are verbal ones, and are not legally binding. One confirmed agreement was that Taiwan would double the investment ceiling of Chinese institutional investors in local stock markets from US$500 million to US$1 billion.
On Tuesday last week, China Securities Regulatory Commission Director-General Tong Daochi (童道馳) told a Taipei press conference with his Taiwanese counterpart that the commission would study the feasibility of lowering capital requirements for Taiwanese securities brokerages to obtain qualified foreign institutional investors status in the near future.
Currently, foreign securities firms have to meet a US$5 billion threshold in applying for a license to trade Chinese yuan-denominated “A” shares on China’s stock exchanges in Shanghai and Shenzhen. Taiwanese firms are likely to be exempted from this rule. The commission is considering a more relaxed regulation that would take into account the entire assets of local brokerage firms’ parent companies in meeting the US$5 billion threshold.
Beijing is also studying the possibility of allowing Taiwanese companies to form securities ventures in China with a stake exceeding 50 percent. Tong said the commission was also mulling permitting Taiwanese institutions and individual investors to directly invest in Chinese stock markets using Chinese yuan, with a cap of 100 billion yuan.
The commission is also considering Taiwan’s proposal to allow Chinese companies to trade on Taiwanese stock markets in the form of “T shares.”
The announcement is considered a positive response to Taiwanese securities firms’ long-term aim of tapping China’s stock markets. Fifteen Taiwanese securities firms have established Chinese offices in preparation for the opening up of China’s securities markets since Taipei inked an agreement in 2009 to facilitate cooperation and oversight in the financial sector. However, not one of them has received a license to trade financial tools so far.
The recent progress gave a boost to the stock prices of Taiwanese financial services providers with strong securities subsidiaries on speculation that new Chinese brokerage business would drive growth.
Credit Suisse said in a research note on Wednesday last week that potential rule relaxations would lift overall sentiment for Taiwan’s financial sector, with China Development Financial being its top pick.
Shares of Yuanta Financial Holding Co, the nation’s biggest securities house operator, rose for the fourth straight day to NT$16.05 on Friday, marking the highest level in more than 10 months. The stock price of China Development Financial Holding Corp rallied to its strongest level in nine months at NT$8.16.
Two days ahead of Tong’s meeting with Financial Supervisory Commission Chairman Chen Yuh-chang (陳裕彰), China Development announced that it would merge two of its securities subsidiaries, KGI Securities and Grand Cathay Securities, to create the nation’s No. 2 broker.
It is important for Taiwanese securities companies to have a new growth driver to rejuvenate business and reduce the impact of local stock markets on returns.
However, it is also important to control investment risks and to safeguard investors’ interests when investing in a market like China’s, that has less corporate governance and greater government control.