THE Economic Co-operation Framework Agreement signed by Taiwan and China on June 29th encompasses hundreds of categories in goods and services (see article). Negotiations were particularly wrenching for agriculture and financial services because each, in its own way, raises security concerns.
The risks that come from the loss of control over food supplies are obvious. The link between financial services and security is more subtle. China’s banks, insurers and brokerages are all, to at least some extent, state-controlled. No surprise then that Taiwan, if it hopes to remain politically independent, fears having its companies nourished by credit that is run by Beijing. Anyone doubting the intensity of these concerns need look only at the American government’s efforts to sell AIG’s Taiwanese life-insurance operations to a Hong Kong partnership that is suspected of being backed by mainland money. The deal, announced last year, is still stuck in regulatory purgatory in Taipei.
To address these concerns, the financial-services section of the agreement seemingly favours Taiwan. Taiwanese banks will be able to buy up to 20% of mainland institutions, whereas mainland institutions will be limited to only 5% of Taiwanese banks. China’s snail-like approval process, which forces a foreign bank to spend years before doing local-currency business, will be relaxed for Taiwanese firms. Getting these details nailed down helped push the date of the signing back from as long ago as 2001, when many thought an agreement was close.
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China and Taiwan: The ties that bind?
Jul 1st 2010Much has changed since then. For decades, as China’s economy slept, Taiwan’s banks were better off than their mainland peers. No longer. Taiwan’s financial system is fragmented and highly competitive. One consequence of this is low profit margins (the average net interest margin for Taiwan’s big banks is roughly half that of China’s) and low growth rates. Mainland institutions have the wherewithal to dominate Taiwan, but the vastness of the Chinese market is also the reason why the Taiwanese banks have more to gain.
Many of the largest Taiwanese companies already have big mainland operations, among them Hon Hai Precision Industry Company, a now-infamous contract manufacturer for Apple and others, and Yue Yuen, which makes innumerable brands of shoes. In the past Taiwanese banks were blocked from following their clients into China. Peter Kurz, head of research in Taiwan for Citigroup, says his scepticism about the value of the deal ebbed considerably after hearing from local banks that they believe half of their loan books could be drawn from the mainland within a decade.
Tie-ups are likely to start slowly, and will probably grow out of existing relationships. One rumour is that the first deal may be an investment by Far East National Bank, whose corporate parent, SinoPac, has property and cement businesses in Chongqing and, it is believed, a good relationship with a local bank. Deals in the other direction will be rarer. Mainland institutions have little financial incentive to push into Taiwan’s saturated market. Politics, too, argues for caution. This week’s agreement may have been carefully drafted but sensitivities between the two countries still run high.