China-Taiwan tensions to dampen pace of RMB development

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Taiwan is experiencing delays in establishing itself as an offshore renminbi hub judging by the slow pace of development in the past few months, indicating that political tensions continue to plague the relationship between the city and the mainland, says Asiamoney, a sister publication of EuromoneyFXNews.

The People’s Bank of China (PBoC) announced on December 11 it decided to appoint Bank of China’s Taipei branch as a renminbi clearing bank for Taiwan, a decision that was supposed to take place in early November.

This delay, combined with the uncoordinated announcement between the Chinese central bank and Taiwan’s Central Bank of the Republic of China (CBC), signals the continued strained relations between both nations.

"In the case of Hong Kong, there’s a coordinated effort and whenever they make the announcement they would do it in concert between the PBoC and HKMA [Hong Kong Monetary Authority], whereas here only PBoC made the announcement last night [December 11] and there were no details on the CBC website," says Raymond Yeung, Greater China senior economist at ANZ .

The same could be said for the announcement made a few months ago. In August, the CBC offered a level of detail about the memorandum of understanding, while the PBoC’s announcement was short and precise.

This suggests it would take longer for Taiwan to establish the necessary institutional infrastructure should it aim to reach the same scope of operation as Hong Kong, according to ANZ in a research report.

"It seems that political protocol is still dragging the pace of development," says Yeung. "In the case of Hong Kong, both the mainland and the SAR can push through the market development more efficiently. It may take a little longer to achieve a full set of operations similar to the case of Hong Kong."

Also, the Chinese central bank has not released any detail about the basis of selection and the scope of the offshore renminbi business to be operated by the clearing bank.

Despite all these issues, December’s announcement is still a breakthrough for offshore renminbi markets, as Taiwan is now the second economy to have a clearing bank officially appointed by the PBoC.

ANZ also highlights that the potential of offshore renminbi business in Taiwan is substantial.

"The strong cross-strait trade flow and investment link are essential to building a large offshore renminbi pool in Taiwan," says Yeung.

Customs statistics in Taiwan show the total value of cross-strait merchandise trade reached $120 billion from January to October this year. If 10% of trade is settled in renminbi, the volume of trade settlement transactions could reached Rmb75 billion ($12 billion), notes the Australian bank.

Additionally, since Taiwan runs a trade surplus with the mainland and some investors might choose to switch their renminbi deposits from Hong Kong, ANZ believes the island’s renminbi deposits can potentially surplus Rmb60 billion – versus Rmb19.3 billion on October 2012 – within six months after the formal launching of renminbi business in domestic banking units.

"From our recent visits and seminars, we notice clients having strong interests in the renminbi," says Yeung. "On the corporate side, treasurers are eager to match their account payables and receivables in the same currency.

"In retail banking, given the low yield of Taiwanese dollars, local residents will have a strong incentive to include renminbi-denominated assets in their portfolio. Today’s announcement will lift the development of Taiwan’s wealth management business next year."

Taiwan had earlier made the Bank of Taiwan’s Shanghai branch a renminbi clearing bank after an agreement signed with China in August.