A strait yuan trade deal

Beijing and Taipei are working a plan that would turn the island into a major offshore settlement centre for the Chinese currency

PUBLISHED : Thursday, 01 November, 2012, 12:00am
UPDATED : Thursday, 01 November, 2012, 4:48am


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Beijing has been on a charm offensive to bring Taiwan closer into the fold. First, it lowered trade and investment barriers, and then it allowed mainland tourism to the island.

Now it is widening use of the Chinese currency.

The island's entrepreneurs need access to the yuan to settle business they have long been doing across the Taiwan Strait. As a result, Taiwan is shaping up as something of a model offshore yuan settlement centre. The only hitch is that the system is not quite all in place yet.

Hong Kong leads the pack in terms of an offshore centre for the yuan, also known as renminbi. Singapore, Malaysia and London are also trying to establish centres.

"What has kick-started the issue of who could be next is clearly a function of Taiwan" emerging as a yuan settlement centre, said Paul Mackel, Asian currency research head with HSBC in Hong Kong.

"So, we need to get set for more offshore renminbi centres eventually being announced. More offshore renminbi centres will only serve to enhance overall offshore renminbi liquidity and facilitate the process of renminbi internationalisation."

Offshore settlement centres also lift local financial services industries. The growing number of such centres gives investors outside the mainland more choice on trading partners or where to settle up with their mainland business.

It allows offshore investors to settle accounts with the usually non-convertible Chinese currency without costly foreign-exchange conversions. Yuan received can later be re-used, exchanged for other currencies or kept on deposit.

"It's a financial service and places are interested in promoting financial services as an industry," said Tim Condon, Asia head of research with ING in Singapore. "Wherever there's significant trade with China, there are companies who prefer to invoice those trades in yuan to avoid the exchange-rate risk."

Before 2008, Taiwan was a bitter political rival of mainland China. But as tensions have eased, two-way trade reached US$160 billion last year and Taiwan is relaxing investment limits on mainland money. Taiwan-based analysts also believe Beijing wants to impress Taiwan's public to smooth the way for reunification.

For now, the currency system is a work-in-progress. The two sides signed a deal in August allowing each to set up a clearing bank for yuan-Taiwan dollar trades. Details are expected to emerge in coming months.

Central banks on each side also are working on a swap agreement to ensure adequate yuan supply, and want to draft regulations to help boost yuan business in Taiwan, Citigroup economist Cheng Cheng-mount says.

Taiwan's historic trade surplus with the mainland and competition among 39 local banks for innovative services help make yuan-Taiwan dollar trades easy for institutions on the island, says C.Y. Huang, chairman of the Taiwan Mergers & Acquisitions and Private Equity Council. He expects local, rather than foreign firms, to be the main customers.

"I open with a bank's offshore banking unit, which is inside Taiwan," Huang said. After that, he said, trading for yuan "is just like if you have US dollars and want to trade for Taiwan dollars".

Taiwan is unlikely to overtake Hong Kong, where banks last year handled 1.91 trillion yuan (HK$2.36 trillion) in yuan trade settlement, or more than 90 per cent of total settlements outside the mainland. Multinational corporations already tend to work out of Hong Kong, making them obvious clients, and the territory claims the closest ties to Beijing.

Malaysia, China's most active Southeast Asian trading partner, also aspires to be a centre. Eleven Malaysian financial institutions have joined a state-run yuan clearing system, allowing trade settlements plus electronic yuan fund transfers.

Singapore, one of the most liquid financial markets in Asia, said in April that China was planning to appoint one of its banks to clear yuan settlements, a boon to the regional financial centre.

London, meanwhile, is positioning itself to be what the city calls a "Western hub" for yuan trades with China, following talks this year and last with Chinese officials. The city says its liquidity, legal system and non-Asian time zone could help turn the Chinese unit into more of an international currency.

Each centre will have its own clientele, meaning no direct competition. Still, the other offshore settlement centres might envy Taiwan for its keen co-operation from Beijing and the organic interest of local businesspeople whose trade and direct investment with the mainland create natural flows of yuan. Taiwan's central bank had accumulated 17.542 billion yuan as of the end of August.

"Taiwan's advantage is that there is a captive base of companies who actually do business in China and who would require yuan deposit and financing facilities," said Wai Ho Leong, regional economist with Barclays Capital in Singapore. "So would the million or so Taiwanese who actually live and work in China, but maintain assets in Taiwan. Locating a centre for settlement in Taiwan itself would clearly make sense from a need perspective."