Taiwan and China sign historic finance deal

Taiwan and China signed a memorandum of understanding (MOU) on Nov. 16th, paving the way for financial sectors on both sides to have greater access to each other’s financial markets. Taking effect on mid-January 2010, these three documents will cover banking, insurance and securities.

In order to avoid political controversy, Taiwan’s chairman of the Financial Supervisory Commission, Sean Chen, signed the documents as a “representative of the financial regulatory organization” for the Taiwan side, while his Chinese counterpart did the same as a “representative” for the mainland side.

The contents of the documents cover the exchange of financial information, establishment of financial institutions, financial supervision, and setting up a mechanism for dealing with risk management, which is crucial in dealing with the aftermath of a global financial crisis. Further details will be ironed out when Taiwan's Strait Exchange Foundation (SEF) and China’s Association for Relations across the Taiwan Straits (ARATS) meet to discuss the FTA-like economic cooperation framework agreement (EFCA) on December 21st to the 25th in Taiwan.

In an interview with the Commonwealth magazine, Chen likened the MOU to a “general admission ticket to a theme park. You must have a ticket to be allowed to enter. But there are more requirements you need to meet to be able to enjoy the rides and attractions.” He noted the signing of the MOU would allow the financial sectors of Taiwan and China to enter each other’s market. As for what preferential conditions China would give to Taiwan, this will be discussed at future ECFA negotiations between the two sides.

The Taipei-based China Post reported most foreign investors hailed the MOU as a long-term positive step to the development of Taiwan’s financial markets with the anticipation of a greater inflow of capital. A few, however, cautioned it might trigger profit-taking by some investors in the short-term.

International ratings agency Moody’s considered the MOU to be more favorable to Taiwan’s financial sector than to the Chinese mainland because closer relations across the Strait will undoubtedly bring extra business opportunities and diversified profits for Taiwan’s financial sector. Moody’s said Taiwan’s financial institutions enjoy the advantages of speaking the same language and of belonging to the same culture, but they need to have long-term plans and strategies in place as well.

According to the Taiwan News, government officials presented a report to the Legislature, and left immediately to sign the documents, leaving no time for a thorough discussion on the issues. The opposition Democratic Progressive Party (DPP) criticized the government for not standing firm on the name issue of “Taiwan, Penghu, Kinmen and Matsu Customs Area” it had used under the World Trade Organization (WTO), but instead, accepting a one China-like framework. The DPP demanded to have the full MOU reviewed by the Legislature.

Newspaper editorials on the island saw the MOU as both an opportunity and a challenge for Taiwan. The United Evening News said the MOU went beyond dealings between the SEF and ARATS to create a new precedent without violating the spirit of the WTO.

The Taipei-based China Times said the seven Taiwanese banks, which already have offices in China can now be upgraded with branch offices there. In future ECFA negotiations, Taiwan’s government should ask China to allow Taiwanese banks to participate in local currency business immediately, without a waiting period of three years. Hopefully, future talks will also stress preferential conditions for Taiwan’s insurance companies and securities sector.

However, given that Chinese banks are much bigger in scale than those in Taiwan, the China Times noted it might leave Taiwan’s smaller banks vulnerable to mergers if they are not innovative and healthy. Only banks with excellent performance and huge capital support will be able to explore the new frontiers in China.

The Commercial Times also sees other problems arising since China’s currency RMB has steadily appreciated, tempting Taiwanese to convert their currency to RMB instead. This would change the financial landscape and weaken Taiwan’s financial position.

In any case, the MOU with China is significant since it provides for new opportunity to negotiate the ECFA and a normalization of economic and trade relations between Taiwan and China. It is significant since it allows more open markets for the two sides. Taiwan’s financial services can develop new stages in a huge market, in addition to serving the Taiwanese already doing business in China. As it stands, Taiwan currently has similar MOUs with thirty other countries, according to The Economic Daily.