Bridging the Strait

The government of the new Taiwanese President Ma Yingjeou has, over the past few weeks, taken a number of key steps towards financial services liberalization between Taiwan and the mainland that are pointing towards a more integrated financial sector. The two players have always been closely economically intertwined, but there have been many barriers in place that have prevented a more complete integration. Those barriers are now starting to come down.

Xiamen is a bustling sea-port near the Taiwan controlled island of Kinmen. Originally a British tea trading port, it was designated a special economic zone about 25 years ago and has boomed since with a large amount of investment coming from Taiwanese businesses. Recently, Fubon Securities, the securities arm of one of Taiwan’s largest banks, was given approval to take a 20% stake in Xiamen City Commercial Bank. The CBRC is likely to give the approval to the deal in August, which will mark the first time that a Taiwanese bank has had an operation on the mainland. The investment makes a lot of sense as there is significant cross-straits business happening in Xianmen. It is however a relatively small deal though and carries only about $2 Billion in assets and ~30 branches.

It goes both ways

The cross-strait investment is also poised to go the other way as a number of mainland banks are actively eyeing the Taiwan opportunity as many of their mainland clients are also quite active in Taiwan. The market also offers some interesting possibilities for banks that are looking to try more sophisticated products or product delivery such as mobile banking, a product that the mainland isn’t really ready for. Interestingly in this entire process is that China doesn’t officially recognize Taiwan’s government or any of its agencies. The Xiamen deal is in fact being done through Fubon’s HK subsidiary.

In addition to corporate investment, the government will soon allow Chinese investors to invest in Taiwan’s stock and futures market through China’s Qualified Domestic Institutional Investors program (QDII) which allows selected financial institutions to invest in overseas markets on behalf of mainland Chinese investors. Initial estimates indicate that as much as $1.13B might be invested in Taiwan’s market.

The Xiamen approval as well as a number of other moves by Mr. Ma's government represent a growing thaw in relations between the two countries. In addition to financial changes, Beijing and Taipei have now opened up regular direct charter flights between the two nations which were previously banned for decades. These moves are in addition to the other measures already in place since earlier this year including allowing banks to trade in Yuan (not since the Communist revolution) and giving Taiwanese banks increased flexibility to invest in in previously restricted investments in mutual-funds based on Chinese stocks.

As the two entities reconcile more of the political differences and move closer, financial integration is inevitable. Although separated by political distance, both economies are very tightly tied together and liberalization in banking, in many respects, has lagged behind the rest of the business relations between the two entities. The integration will only benefit both sides in the short-run, but will also face a challenge to Taiwan as to how quickly they actually do want to integrate with the mainland. The current government is moving things in that direction, but how fast the people want to go (if at all) could be another matter.