For people outside the banking sector, China’s approval on Thursday for four Taiwanese banks to upgrade their representative offices into branches reflects further progress in cooperation across the Taiwan Strait following the signing of the Economic Cooperation Framework Agreement (ECFA).
However, for insiders the move represents a potential game-changer in the cross-strait financial sector, foretelling the onset of more competition for banks on both sides, rather than cooperation.
With this regulatory go-ahead, through their Chinese branches, the Taiwanese lenders will be able to offer yuan-based services to Taiwanese companies in China after one year of operation if they have a proven track record of posting a profit. With two years of profit making, these branches can extend the yuan services to all customers in China.
At a glance, it would seem that their greater access to the Chinese market would mean improved earning for the Taiwanese banks, especially given the highly fragmented market and stiff competition on their home turf. It is no surprise then that several financial shares surged on the local bourse on Friday thanks to the news of the China branches.
There is no doubt that China’s approval of the branches had been eagerly awaited by Taiwanese banks, even though other restrictions on banking operations in China remain, such as limitations on the savings-to-loans ratio, the number of branches and source of loans.
However, the issue is not really about whether Taiwanese banks can earn in China or how fast they can make that happen, which may occur eventually in the longer term, but not in the near-term. In fact, what is bound to happen very soon is the recruitment of new employees, the development of business strategies and the establishment of new information systems at their new branches.
Unknown operating risks and strong domestic competition in China are likely to hinder Taiwanese banks during the first few years of operation, while developing capabilities to control credit risks and maintain adequate capitalization to support further business growth in China will be their next challenge.
Moreover, cross-strait banking is a sensitive issue to both Taiwan and China, not only because the issue involves political and economic considerations, but also because the stabilization in the domestic financial market on either side is important to national security.
Therefore, since financial regulators on both sides have taken cautious and gradual steps regarding the opening of cross-strait market access, people should not have unrealistic expectations about the branch openings as well.
Moreover, Taiwanese regulators will eventually give the green light to Chinese lenders to set up shop, based on the principle of reciprocity and to comply with the ECFA.
While Taiwan’s fragmented and competitive market — known for generating relatively thin profit margins compared with China’s — is not likely to initially attract many Chinese lenders looking to expand to Taiwan, they will come eventually. And with their more substantial assets and bigger business scale, Chinese banks are likely to become strong rivals to their Taiwanese peers and significantly impact market dynamics in this sector.
Under the mandate of the Taiwanese and Chinese governments, cross-strait trade exchanges and liberalization are accelerating. As this trend continues, financial regulators on both sides should encourage their banks to take a cautious attitude when branching out into each other’s market and offer them an environment of fair competition on a level playing field. The reality is that when it comes to business, prudence is of utmost significance.
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