Taiwan builds bridges with the mainland

"We would like to see the same kind of banking services that we offer here in Taiwan offered in China as well" Victor Kung, Fubon Financial

The reason for the uncommon optimism is chiefly political. On March 22, the Taiwanese voted in a new president, Ma Ying-jeou. But the reason the markets have responded so favourably to the victory has nothing to do with Ma’s vision for domestic policy: it’s all about China.

Ma’s predecessor, Chen Shui-bian, was not a popular figure with China, and the feeling was mutual. Chen was a pro-independence figure who wanted statehood for Taiwan, rather than the curious halfway house it occupies today: a strong and successful democracy but with no official standing as a world state, unable to participate under its own name anywhere from the Olympics to the UN. Chen’s stance certainly had a following among Taiwanese but it came at a cost: relations with China were consistently difficult under his tenure and the impact on Taiwanese business drastic.

President Ma has come to power on a platform that promises much closer cooperation with China. The feeling is that, while in an ideal world many Taiwanese would like independent statehood, they don’t care strongly enough about it to accept the accompanying economic handicap. Ma has had to tread a fine line politically, ensuring that he doesn’t appear to be giving everything to China, but his message of closer engagement was enough to win the election.

"There’s a definite change of mood for the domestic economy here in Taiwan," says Matthew Smith, a research analyst at Macquarie Research in Taipei. "A dead hand had been in place for longer than a decade with the restrictions on economic links with China. This dead hand is now being lifted, and the relief that’s being felt from that is driving a lot of optimism."

Although there are plenty of iconic measures that will demonstrate this new-found friendship, the one that will grab world headlines will be the beginning of direct flights between Taiwan and mainland China, probably from July, albeit only on weekends. One of the areas that stands to benefit most from improved relations is the financial services industry. Taiwanese banks have not been permitted to acquire Chinese institutions, and have only been able to serve their clients’ activities on the mainland in a limited way, usually out of Hong Kong subsidiaries. Mutual funds managed from Taiwan have been unable to invest in Chinese securities. And this matters because Taiwanese businesses and individuals, generally not subject to such restrictions, have been highly active in China: it has been estimated that Taiwanese have $150 billion in investments in mainland China.

It has been a source of immense frustration to Taiwanese banks to watch their clients head into China but be unable to follow them. Everything ought to be in their favour: language, proximity and, to a lesser extent, culture. Now there’s a chance that Taiwanese banks will get a chance to compete. One of the first policy pledges to have been made is to remove a long-standing 40% cap on the amount of their net worth that Taiwanese companies can devote to China. In reverse, Chinese companies will be permitted to make strategic investments into Taiwanese listed companies. "Previously, they considered each other the enemy," says CY Huang, president for greater China investment banking at Polaris. "Now it will be a two-way flow. And of course these investment activities will need money, so there are going to be more financing activities, which is good for banks and securities companies."

Huang adds: "How do you help a small Taiwanese company in China? There’s a severe credit tightening there and many Taiwanese companies will be affected; they may need creative solutions." That’s now an opportunity for Taiwanese banks that can build greater China offerings, whether for corporate finance, risk management or treasury.

Also, a highly significant transaction looks close to taking place. For years, Fubon Financial, one of Taiwan’s biggest financial holding companies, has been sounding out a Chinese commercial bank based in Xiamen. The plan has been to acquire it through Fubon’s Hong Kong subsidiary, and the Hong Kong Monetary Authority has been acting as a behind-the-scenes broker for the Taiwanese and Chinese authorities. Progress has been slow but in March Taiwan’s Financial Supervisory Commission announced that it would allow Taiwanese banks to use their overseas subsidiaries to invest in mainland Chinese banks. All that remains is for China to approve it.

"We hope that we can close the transaction some time early in the third quarter," says Victor Kung, president of Fubon Financial. "We would like to see the same kind of banking services that we offer here in Taiwan offered in China as well."

The progress of the Fubon deal will be closely watched. If it goes well, other deals are likely to be allowed; if not, that will clearly have consequences, too. Those close to the deal say it is important not to get too carried away, though. Under the latest rules, banks will only be allowed to hold 20% of a Chinese bank. Besides, the approval is only for Hong Kong subsidiaries with $6 billion in assets. And at the moment, Fubon is the only one with the muscle in Hong Kong to do it.

"It is significant but there are not many Taiwanese enterprises that have the financial muscle, the recognition and the international savvy to go abroad," says Huang. "Apart from Fubon, there are a few like Cathay Financial Holdings, but maybe only four financial institutions have the capacity and motivation to do that." Sinopec has been rumoured to be looking at purchasing a bank in Hong Kong and has been linked with the banking assets of Ping An there. "But you shouldn’t expect a lot of Taiwanese financial institutions rushing to do this," he says.