Taiwan: The dilemmas of nationalism

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In March, Taiwan’s voters will go to the polls, and as ever the issue of cross-strait relations with mainland China will be key. And few groups will have more at stake than Taiwan’s banking sector.

Taiwanese banks face plenty of headwinds: a severely overbanked market, with 38 institutions even after a recent round of consolidation; the increasing threat from international players, with Standard Chartered, Citi and ABN Amro all having acquired local banks in the past 12 months; the consumer credit crisis that blighted one of the most profitable parts of the banking industry two years ago, and that is still hanging around in the form of restructured loans (at much less lucrative terms for the banks) on their balance sheets. But the biggest challenge they face is that they can’t go and set up in China.

It’s not as if Taiwanese businesses don’t engage with China just because of cross-strait tensions. In fact, the mainland accounts for about one-third of Taiwan’s exports, and the trend is for more and more involvement.

But banks can’t follow other businesses. They can set up in Hong Kong, but they can’t build a business in any meaningful form physically based on the mainland. One bank, Fubon, thought it had found a way around this by using its Hong Kong subsidiary as a vehicle to purchase a mainland bank, with the subsidiary regulated by the Hong Kong Monetary Authority rather than Taiwan’s regulator, but there’s still no sign of approval for that to move forward.

Worse, Taiwanese individuals are increasingly taking their money to foreign wealth managers for the same reasons. If they buy mutual funds in Taipei, they know those funds can’t hold Petrochina or China Mobile or any other Chinese stock, even a Hong Kong-listed H share, so instead they go to global institutions that can give them the exposure they want. Local banks are watching money disappear at both a corporate and an individual level.

So what has this to do with the election? Bankers feel that no matter who wins, the next president will take a more conciliatory line with the mainland than Chen Shui-bian has in his two-term administration. There are differences in overall policy – the KMT envisages a unified China including Taiwan, the DPP favours the idea of eventual independence – but in either event there is likely to be less brandishing of swords than has recently been the case. In such an environment, it’s possible that mainland and Taiwanese regulators can find common ground that allows Taiwan’s banks to set up properly in China.

Nationalism, however justified, hasn’t done the Taiwanese banking sector any favours.