Taiwan and China yesterday inked a memorandum of understanding (MOU) on a currency clearing agreement, paving the way for yuan-based financial products and services that are in high demand as trade ties between the two countries increase, central bank Governor Perng Fai-nan (彭淮南) said.
Starting next week, the offshore banking units of Taiwanese lenders may start yuan lending with their Chinese counterparts, Perng said.
“The signing of the MOU marks the first step in setting up yuan clearing services,” Perng told a news conference.
More needs to be done to reach an agreement and the central bank will try to facilitate the process, but cannot decide the pace unilaterally, he said.
The MOU is to take effect within 60 days and enables monetary authorities on both sides to designate one local bank each to provide currency clearing and settlement services, Perng said.
All Taiwanese lenders with branches in China are eligible to be chosen as Taiwan’s clearing bank and the central bank will appoint one under the principles of fairness and openness, he said.
The declaration counters a popular belief that the state-run Bank of Taiwan (台灣銀行) or Mega International Commercial Bank (兆豐國際商銀) would be the intermediary for the Taiwan side, while the Taipei branch of Bank of China (中國銀行) would be responsible for yuan exchange and reflux.
Perng declined to say when the central bank will choose a clearing bank — without which cross-strait currency settlements and business opportunities cannot proceed.
Once currency settlements are in place, policymakers may go ahead with plans to turn Taiwan into another regional offshore yuan hub like Hong Kong and extend yuan-based business to domestic banking units, Perng said.
“There will be a new yuan spot rate known as ‘CNT,’ versus ‘CNH,’ which refers to the yuan trade in Hong Kong,” the governor said.
With cross-strait trade hitting over US$100 billion (US$3.34 billion) a year, Taiwan is well-positioned to develop a yuan offshore banking unit, he said.
Taiwanese exporters have pressed for a yuan settlement mechanism, saying it would save them huge foreign exchange costs. Presently, all yuan and New Taiwan dollar settlements are conducted through Hong Kong, where the Bank of China (Hong Kong) offers yuan cash settlement services to the Hong Kong branches of Bank of Taiwan and Mega Bank.
Local financial institutions are also looking to benefit from yuan services and products, while the Financial Supervisory Commission is working on regulatory easing. Since the yuan remains a controlled currency, the central bank cannot use it as a reserve currency, Perng said.
The central bank will be careful to control the amount of New Taiwan dollars being deposited and converted in order to avoid negatively impacting the local currency, the governor said.