China-Taiwan Trade Deal a Long-term Positive for Taiwan's Banks
The Economic Co-operation Framework Agreement (ECFA) signed 29 June 2010 by Taiwan and China will allow qualified Taiwanese banks to enter the mainland China market more quickly than without the preferred status the agreement confers. The deal is credit positive for those Taiwanese participants that make successful inroads into China’s mainland market and benefit from diversifying their risk profiles and sources of earnings, according to Christine Kuo, vice president/senior analyst, Moody’s.
The ECFA gives preferential treatment to Taiwanese firms in China (it is similar to the Closer Economic Partnership Arrangement signed by China and Hong Kong in 2003). It follows a November 2009 memorandum of understanding (MOU) on cross-straits regulatory cooperation that subsequently prompted seven Taiwanese banks in April 2010 to file applications with Taiwan’s Financial Supervisory Commission (FSC) to convert their mainland representative offices into branches or to establish subsidiaries.
The agreement, if ratified by the Taiwanese legislature, will allow Taiwanese banks to open branches or subsidiaries in China and offer services in the local currency one to two years sooner than foreign banks could under previous government regulations. These measures are important for Taiwanese institutions, which are late entrants to China’s mainland market.
Of the seven Taiwanese banks that have applied for licenses, four received approval from the FSC just days before the ECFA’s signing, with the rest likely to be approved next quarter. Nevertheless, Moody’s does not expect operations to begin until late 2010 or 2011 because participants must also secure approvals from Chinese regulators.
Operating in mainland China will allow Taiwanese banks to follow their clients, which have been investing in China for the past two decades. Additionally, it will provide opportunities to build another core market. As a result, Taiwanese banks will be able to diversify their operations beyond Taiwan’s mature, competitive, and low-margin market. However, it will take several years of development, appropriate levels of capital, and prudent risk-taking in the expansion of loan portfolios to realise the benefits.
Some Taiwanese banks may form joint ventures with smaller, local Chinese banks to gain knowledge of the Chinese mainland market and position themselves to assume an increasing stake in the venture if future deregulation permits.
Most Taiwanese banks are likely to target as customers small and medium enterprises (SMEs), an underserved market in China, but one in which Taiwanese banks have considerable experience. Chinatrust Commercial Bank, in particular, is also likely to move into the lucrative business of consumer finance and credit cards, a core strength that is also underserved on China’s mainland.