Taiwan to allow banks to invest in China

Investors see the vast China market as one of the best opportunities for growth for Taiwan banks, which face stiff competition in their mature home market. Stronger business ties with the mainland could also boost the island's sputtering economy, which has been a hot topic during the election campaign.

"The opening marks a milestone for Taiwan's banking industry. ... It creates substantial business opportunities," said president Jeff Chang of the fund arm of Cathay Financial, Taiwan's top financial holding company.

"It's going to take two to three years to see a real earnings impact, though."

The planned opening, which is expected to be approved by China soon, sent the Taiwan stock exchange's financial sub-index 1.5 per cent higher by midday.

Investor optimism that the elections will lead to positive changes toward Beijing has fanned a 14 per cent rally in the sub-index this year, while financial shares elsewhere in the world tumbled on fears of a US recession and credit market turmoil.

China sees Taiwan as a renegade province that must be ultimately reunified with the mainland, by force if necessary.

But despite political differences, China has been the favourite overseas destination for Taiwan firms, which have pumped more than $100 billion (Dh367 billion) into mainland investments. China is also the island's top trading partner.

Banks in Taiwan, Asia's fourth-largest banking market, can invest in Chinese counterparts via their off-shore subsidiaries, said Premier Chang Chun-hsiung, while declining to give a timetable.

We're going to let Taiwan banks' offshore units invest in Chinese banks," he told reporters after the Cabinet's regular weely meeting.

The announcement is the latest in a series of recent relaxation measures toward China investment by Taiwan's ruling Democratic Progressive Party (DPP), which is trailing in most opinion polls less than two weeks before the March 22 presidential election.

The cabinet said last week it will loosen a cap on Taiwan companies' investments in China, following years of complaints from local businesses that the restriction undermines their competitiveness.

China is the favourite investment destination of Taiwan firms, but the Taiwan government has imposed a broad series of restrictions designed to prevent over-reliance on the mainland.

Chairman Liu Ming-kang of the China Banking Regulatory Commission (CBRC) said recently the CBRC, China's chief banking regulator, will approve Fubon Financial's plan to buy a stake in Xiamen City Commercial Bank, once Fubon submits its application, according to local media.

Fubon is the only Taiwan financial company that has a Hong Kong subsidiary, Fubon Bank (Hong Kong), and is widely expected to be the first to be allowed to invest in a mainland lender.

Earnings impact

Taiwan's financial stocks, whose valuations have been among the region's lowest for years due to a consumer credit crisis and limited progress in major consolidation, have recently been embraced by foreign investors and fund managers who see them as a springboard into the China market.

Cathay Financial's chairman said recently the company plans to buy a stake a Chinese bank on hopes of better ties between China and Taiwan.

Chang said his fund company, with T$100 billion ($3.26 billion; Dh11.96 billion) assets under management, will continue to buy shares of Fubon, Taiwan Cooperative Bank and other banks.

The new rule will likely speed up investments by banks on opposite sides of the Taiwan Straits.

Taiwan's top financial regulator, the Financial Supervisory Commission (FSC), has said it was considering allowing Taiwan banks to open branches in China and letting Chinese banks open representative offices on the island.

About 10 Taiwan banks are expected to get permission to open mainland branches, as they meet China's requirement of having $10 billion (Dh36.7 billion) in assets, said analyst Nora Hou of Deutsche Securities.

The 10 include seven lenders, such as Cathay Financial and First Financial that already have representative offices on the mainland.

Fubon shares have risen 18 per cent so far this year, while Cathay Financial is up 15 per cent. (Reuters)