With Taiwan and China reaching agreements to allow banks better access to each other’s markets, as well as SinoPac Financial Holdings Co entering into a private placement with Industrial and Commercial Bank of China (ICBC) to allow the latter to acquire a 20 percent stake in the Taiwanese company or in its banking unit, people have turned their attention to whether the cross-strait financial exchange can move forward on a solid basis and if the government knows that diversification beyond China is imperative.
Under the agreements reached between Taiwan’s Financial Supervisory Commission (FSC) and its Chinese counterpart, the China Banking Regulatory Commission (CBRC), Taiwan would offer Chinese investors opportunities to hold higher shareholdings in Taiwanese financial institutions; China would facilitate Taiwanese banks to set up more subsidiaries or branches in China; and both sides would move to ditch the OECD prerequisites for reciprocal branches or investment in bilateral markets.
For years, banks on both sides of the Taiwan Strait have called on governments to treat them at least as well as other foreign banks and maybe better. Last week’s agreements showed that the regulators on both sides have taken banks’ concerns to heart, and the relaxed rules indicated expanded investment for first-tier banks in both countries, as well as opportunities for more second-tier banks to tap into each other’s markets.
Although many of the agreements were reached in accordance with market expectations and within the cross-strait Economic Cooperation Framework Agreement (ECFA), Taiwan’s agreeing to Chinese banks holding a higher shareholding in its banks was a policy breakthrough and could indicate a watershed for cross-strait financial exchanges.
Under the relaxed rules, a Chinese lender can choose to invest in a Taiwanese financial holding company or its banking units, but not both; a Chinese bank can buy up to 10 percent of a listed Taiwanese financial holding company, up to 15 percent of an unlisted financial holding company and 20 percent of a banking subsidiary of a listed Taiwanese financial holding company.
China already allows Taiwanese banks to hold stakes of up to 20 percent in Chinese banks, so that Taiwan’s relaxed limits on Chinese banks adhere to the principle of reciprocity. Once both governments give their approval to SinoPac selling shares to China’s ICBC, this deal could allow the Taiwanese firm to further build up operations in China, and strengthen its yuan-denominated business at home.
It remains unknown whether other banks will follow in the steps of the SinoPac-ICBC move, but there are already growing worries in Taiwan about whether Chinese banks will pursue stakes in Taiwan’s state-run banks and if they will seek seats on the boards of Taiwanese banks, given that most of Chinese banks’ interest in Taiwanese lenders results from political considerations, rather than commercial interest.
As a result, the government must keep in mind that the main strategy behind facilitating Taiwanese banks to engage Chinese strategic partners is to help them expand business to the large number of China-bound Taiwanese businesspeople, as well as to develop the Chinese market; someone in the government must assure that allowing Chinese banks to have higher stakes in Taiwanese banks remains just a supplementary measure.
As far as the management control in Taiwanese banks and share sales in Taiwan’s state banks are concerned, the government should stick to its bottom line and refrain from making more concessions in the upcoming service sector negotiations under the ECFA, during which further relaxations of financial rules may be agreed upon. Moreover, in the wake of signs that many businesses are starting to relocate their operations to other emerging markets because of rising production costs in China, we must hope our government will be able to reach similar market-access deals with other countries and thus help prepare more Taiwanese banks to enter those markets.