Another pirouette into Beijing's Embrace
Starting Saturday, Chinese and
Taiwanese banks are expected to be able to freely conduct currency exchanges in
both the Chinese yuan and the New Taiwan dollar, paving the way for the island
to become a regional offshore yuan trading hub in direct competition with Hong
Kong and Singapore.
The opening is also expected to
bring about very concrete benefits for Taiwanese exporters, particularly the
taishang, as Taiwanese China-based businesspeople are called. But although a
major portion of Taiwan's population wish to open yuan accounts themselves, the
political ramifications of Chairman Mao's currency gaining a firm foothold on
the island seem manageable for the time being.
For decades, China's yuan and
Taiwan's NT dollar have been non-interconvertible, so that the 80,000-odd
Taiwanese companies operating in China, such as food giants Uni-President and
Want Want, have been forced to resort to the US dollar as an intermediary
before changing their yuan into the NT dollar and vice versa.
Most of the currency flow goes
through Hong Kong's banks. It has been estimated that 30 percent of the 1.5
trillion yuan (US$240 billion) that annually pass through the territory as
cross-border currency settlement is linked to the taishang. When Beijing and
Taipei signed a memorandum of understanding on currency clearing on Aug. 1, it
became clear that the Taiwan-related windfall for Hong Kong, the testing ground
for offshore yuan transactions and the largest financial center for the trading
currency, comes to an end.
But it is not only the avoidance
of significant foreign exchange transaction losses that is good news for
Taiwan. The NT dollar has appreciated 3.6 percent against the US dollar so far
this year, gnawing away at the profit margins of the island's exporters and
small-to-medium enterprises and making Taiwanese goods more expensive relative
to trade rival South Korea's.
Some analysts believe the new
option to hold yuan deposits will encourage the taishang to keep more revenue
in the Chinese currency, which they might later need to upgrade their factories
in China and for trade-related payments there. Demand for NT dollars is
expected then to cool significantly, halting the appreciation. Such an outcome
would by no means be a small matter for Taiwan, especially in face of Seoul's
free trade agreements with the EU and US that came into effect in July 2011 and
March respectively.
Taiwan's Joe Public also welcomes
the yuan with open arms, if Standard Chartered Bank is to be believed.
According to the findings of a recent poll conducted by the British lender's
Taiwanese branch, more than 40 percent of Taiwanese have expressed keen
interest in owning yuan deposits.
The higher interest rates the
Taiwanese banks have already begun dangling for yuan time deposits in addition
to the almost certain appreciation is partly due to Washington's relentless
pressure on Beijing to allow the yuan to rise further, apparently convincing
Taiwanese individual savers. A major run on domestic banks is expected to
materialize shortly. Local media are reporting that Taiwanese lenders are
planning to add hundreds of frontline staff members next year.
“Although Standard Chartered
didn’t disclose its survey's sampling methods, Taiwan's huge FDI on the
mainland, trade, investment, asset allocation and hedging undoubtedly create
huge demand for yuan,” said Hu Sheng-Cheng, an economist at Academia Sinica,
Taiwan's foremost research institution. “It is the mainstream view here that as
soon as yuan-clearing is introduced, 10 percent of the NT$31.5 trillion [US$1
trillion] Taiwanese banks currently hold as deposits in total will be in yuan.”
Hu added that foreign currency
deposits in Taiwanese banks currently amount to NT$ 2.5 trillion, or 8 percent
of total deposits.
From Beijing's perspective, the
relative cost to Hong Kong in terms of currency transactions – which it already
rules over – for the good of Taiwan, which it wants to rule over – by
facilitating the withdrawal of yuan liquidity from Hong Kong seems the only
drawback to the opening. In order to reduce reliance on the US dollar, China
has been expanding its currency relations with trade partners to promote
greater use of the yuan in global trade and investment, and the move to allow
Taiwan to become a yuan hub obviously kills two birds with one stone. It will
not only boost offshore yuan internationalization but also do its share in
spinning the island quicker into Beijing's orbit.
Asked about the political
implications if 40 percent of the Taiwanese population—or 4.4 million, if the
30 to 60 age bracket is counted—now turn to yuan-linked products and services,
Steve Tsang, director of the University of Nottingham's China Policy Institute,
agreed that Standard Chartered's survey must be taken with a pinch of salt
since whether the respondents will actually do what they have told the
pollsters is open to question.
“[But nonetheless] the two
economies across the Taiwan Strait are already so intertwined that having a
significant percentage of Taiwanese opening a yuan account, presumably with
Taiwanese banks, should not change the equation enough to make a big difference,”
he said. “If 40 percent of Taiwanese should keep the bulk of their savings in
yuan but not in NT dollars it would be a different matter and would be hugely
significant.”
Tsang emphasized that such a
scenario is not on the horizon.
Neither does Ronald A. Edwards,
an expert on China's political economy and a professor at Tamkang University in
Taipei, expect the direct political impact to be significant. But the
developments do indicate “a widespread willingness for people in Taiwan to open
the door for potential transactions with the mainland.”
However, for such transactions to
come about on the large scale it takes more trust on the Taiwanese side, he
believes.
“A good share of people would
like to see a few 'example cases' where disputes between parties on either side
of the Taiwan Strait are mediated and rules are applied before engaging in any
large transactions,” he said.
Edwards added that the two
currencies' inter-convertibility might impact somewhat financial reporting and
company structure in Taiwan so that it could facilitate white-collar crime, an
issue that so far hasn’t gathered much media attention.
“Effective regulation will now
depend on the cooperation with mainland officials,” he said.
“These are untested waters, and
we will have to see how it works in practice.”
Jens Kastner
Business & Investment Opportunities
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