Taiwan hopes for China banquet
Published: 20 April 2010
Beijing trade deal and financial pact are important for Taipei
It is said that bankers in Taiwan have often compared the business opportunities in mainland China to a table full of delicious food which they could see, but could not touch. Now the banquet may be about to start.
Taiwan has signed a financial pact with China that will allow its banks to tap the mainland's huge market. The much-anticipated financial memorandum of understanding (FMOU) will also allow mainland banks to invest in the Taiwan banking and financial services sector.
The details will be finalised during negotiations for a trade pact known as the Economic Co-operation Framework Agreement (ECFA) which is expected to be signed in June. The ECFA is particularly important for export-dependent Taiwan as it faces being marginalised after China signed an accord with the 10-member Association of Southeast Asian Nations on 1 January this year.
Huge opportunity for bankers
The FMOU represents a huge opportunity for Taiwan bankers, who know the needs of the vast number of Taiwan-owned businesses in China better than anyone. Faced with an increasingly competitive domestic market, Taiwan's financial institutions are seeking advantages that will enable them to gain a foothold on the mainland as soon as possible. That is why the details of ECFA matter to Taiwan's financial sector, as the pact is expected to reduce barriers for Taiwanese goods and services entering mainland China, and vice versa.
Indeed, it is the rapid improvement in cross-Strait relations that makes HSBC equity strategist Jacqueline Tse bullish about Taiwan's economic outlook.
"One reason why the economic indicators are so strong really comes down to the fact that the cross-Strait relationship is improving so rapidly," she said.
"The FMOU and ECFA really are very significant developments, especially when you remember that it was not long ago it was not possible to do very much at all in this area and there were a lot of restrictions.
Taiwan has China – that is Taiwan's unique advantage.
"This gives Taiwan an advantage as other places have had to rely on the global economy recovering. Taiwan has China - that is Taiwan's unique advantage."
President Ma Ying-jeou set out to normalise trade and investment with China, Taiwan's biggest export market and prime investment destination, after taking office in May 2008. The two sides started direct flights, shipping and postal services across the Taiwan Strait in late 2008, ending a six-decade ban.
Taiwan exports about USD100 billion of goods to China a year and pays an average tariff of 9 per cent to the mainland, while China's shipments to Taiwan are worth about USD30 billion a year, taxed at an average 4 per cent.
Sentiment in the financial sector is very positive now that the FMOU has been signed but it will take time. When the first big deal is announced it will give sentiment another big push.
Taiwan's government estimates that the ECFA would boost economic growth by 1.65 to 1.72 percentage points annually, spurring exports and creating more than 260,000 jobs. Taiwan's economy expanded 9.2 per cent in the three months to 31 December from a year earlier, putting the deepest recession on record behind it as warming ties with China boosted demand for the island's goods.
"Sentiment in the financial sector is very positive now that the FMOU has been signed but it will take time," Ms Tse said. "When the first big deal is announced it will give sentiment another big push.
"The real benefits will not happen overnight. Of course it will help Taiwan banks service their domestic customers who have large businesses on the mainland.
"At the same time, much will depend on the ECFA and whether Taiwan banks get preferential treatment. If they do - for example, not having to wait two years for a RMB licence - it will be much easier for them to make money on the mainland rather than just having a presence there. So much depends on what concessions Beijing agrees to make.
"The ECFA will be another big step down the road to harmonising cross-Strait relations. Tariffs on a wide range of products will be cut or reduced to zero. Overall, there will be more winners than losers.
"Farmers are likely to suffer because they will struggle to compete with cheaper imports from the mainland. The government is taking steps to help them. Remember, not so long ago agriculture was an important part of Taiwan's economy. Bananas were a big export. Now tech is king and iPods are more important than bananas."
In yet another sign of thawing relations between the two economies, Taiwan and China have set up reciprocal tourism offices for the first time in 60 years. Taiwan has raised the daily quota for mainland tourists from 3,000 to 4,300 and many believe a scheme to allow individual visitors rather than group tours is only a matter of time. A similar scheme for mainland tourists introduced in Hong Kong was a huge success.
...agriculture was an important part of Taiwan's economy. Bananas were a big export. Now tech is king and iPods are more important than bananas.
"Tourism is important and was one of the first sectors to benefit," Ms Tse said. "Psychologically, this was important. It was one of the first things to change after President Ma took office. It was bumpy at first but that was because it took time to streamline the paperwork.
"These numbers will grow and the potential is enormous. The individual visitor scheme will be the next catalyst. It will have a ripple effect on airlines, employment, retail and eventually property sales. The impact on economic growth will be significant."
Jacqueline Tse
Jacqueline Tse joined HSBC in February 2008 as an Equity Strategist in Asia-Pacific. Previously, she worked at a US investment bank to manage its FX and liquidity risks in various Asian markets and also on the Economics team to oversee the Hong Kong market.
Before joining the banking sector, Ms Tse was the Senior Financial Analyst at Hewlett-Packard in Silicon Valley. She holds an MSc in Operations Research, focusing on Financial Engineering from Columbia University and a BA in Economics from the University of California, Berkeley.
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