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Renminbi internationalization to turbo-charge Taiwan growth

Business in Taiwan will be a given a boost thanks to the island’s new status as an RMB clearing centre, with analysts predicting RMB100 billion of deposits will fly into the country's banking system by the end of this year.

On January 25, the People's Bank of China (PBoC) and the Bank of China Taipei Branch (BOCTB) signed the long-anticipated Agreement on Renminbi (RMB) Clearing Business. The agreement will allow banks on the mainland and in Taiwan to conduct cross-Strait RMB settlement through the BOCTB, a move analysts say will transform Taiwan's industrial and financial prospects.  

As part of the memorandum, both sides will each appoint a clearing bank to carry out currency settlements and liquidations for the other, and the clearing centres will be able to manage cash exchanges of currencies from both sides. Local banks in Taiwan might start accepting deposits in RMB as early as February. The agreement in January formally marked the decision made in August to develop a clearing centre in Taiwan.

Banks that will actively take advantage of the steps include domestic banks Chinatrust, Mega ICBC and Fubon, which all have active branches on the mainland.

The development is the latest in a long line of measures introduced by the Chinese authorities to internationalize the currency, open up the capital markets and further develop economic ties between the Strait.Taiwan is the third offshore settlement centre after Hong Kong and Macau.

Taiwan is an important trading partner for China, much more so than Hong Kong. According to Deutsche Bank, in 2012 the volume of China imports from Taiwan was more than seven times the volume of imports from Hong Kong.

The development will have important ramifications on Taiwan’s domestic economy, boosting trade between the Strait and encouraging the use of RMB on the island as a result of increased liquidity pools.

“With these new policies in place, Taiwan will likely see a surge in RMB deposits to RMB100 billion [$16 billion] by the end of 2013,” notes Linan Liu, strategist at Deutsche Bank in Hong Kong. “Of the RMB100 billion, RMB40billion to RMB50 billion is likely [to come] from the transfer RMB deposits maintained by Taiwan residents and corporations currently in Hong Kong.

“We project RMB deposits in Taiwan to grow to about RMB200 billion in the next two to three years, supported by asset allocation and diversification demand from both corporate and retail investors."

China is Taiwan’s largest export market and the main source of trade surplus. In 2012, the Taiwan-China trade balance was $95.4 billion.

“As opposed to Hong Kong, where RMB flows in and out, Taiwan’s domestic economy relies heavily on RMB,” says Qinwei Wang, an economist at Capital Economics in London. “The latest development will have a positive impact on the domestic economy by encouraging the line of trade between the mainland and Taiwan.

“More importantly, the agreement will reduce currency uncertainties. There will be little need to hedge against either currency because the agreement would mitigate most of the risk associated with cross-Strait trade.”

Despite being a relatively new market, Liu is positive that the lack of RMB-denominated investment products in Taiwan will not be a hindrance to investors.

When Hong Kong came into the fold as China's premier clearing centre, there was an excessive amount of liquidity chasing a limited pool of offshore RMB assets. However, in an effort to drive the offshore market, Chinese policymakers introduced a number of investment channels to park RMB, including the RMB qualified foreign institutional investor (RQFII) scheme.

“The good news is that, the existing policies on offshore RMB circulation are applicable to the offshore RMB market in Taiwan,” says Liu. "In other words, programmes such as the RQFII ... will be made available to corporations, institutional and retail investors from Taiwan from day one of the Taiwan offshore market development."

However, the development will remain strictly controlled by the Chinese authorities. The individual RMB daily conversion limit will be set at RMB20,000 and Taiwan identification card-holders can only remit RMB80,000 per day to the mainland for current account transactions.

Although Wang argues that the new clearing centre will benefit Taiwan’s domestic economy, the latest cross-border agreement will have little effect on the overall internationalization of the RMB.

He says: “Before there are any more cross-border agreements created, China needs to introduce meaningful reforms to the economy: a free floating currency, liberalized interest ratesand an open capital account. Before this happens, there will be few incentives to hold the currency.”