Will The RMB Bridge The Taiwan Strait?

Increase In Mainland Chinese Tourists, Cross-Straits Investment, Financial Integration Could Lead To More RMB-Denominated Transactions

The number of mainland Chinese tourists, often coming on luxury cruises or group tours, headed to Taiwan has increased as travel restrictions have eased in recent years

The number of mainland Chinese tourists, often coming on luxury cruises or group tours, headed to Taiwan has increased as travel restrictions have eased in recent years

Over the last few years, China has made the internationalization of its currency, the renminbi (RMB) or yuan, a high priority. In the wake of the global financial crisis, as global confidence in the US dollar has been dealt a serious blow, China’s calls for the creation of a new global reserve currency have only been intensified. However, as most experts agree that the US dollar will remain the world’s de facto reserve currency for years to come, China seems to have taken a two-part approach to the issue of global currency flows, consistently calling for the replacement of the dollar by a new SDR at the top policy level, while at the same time working on a more private level with many of the countries and territories with which it trades to settle transactions in RMB.

Earlier this year, pilot program to allow exporters and importers were launched in Shanghai, and China’s southern trade hubs Guangzhou, Shenzhen, Zhuhai and Dongguan cities to settle cross-border trade deals in yuan. As Xinhua wrote at that time,

The cross-border yuan trade settlement is undoubtedly a piece of good news for traders and will boost trade among China’s mainland, Hong Kong, Macao and regional trade partners such as the Association of Southeast Asian Nations (ASEAN).

Song Wei, an associate professor with the Financial School at Renmin University, told Xinhua that cross-border yuan trade settlement provided traders with another option and in the long run would boost a more diversified international monetary regime.

Also over the course of the last year, we’ve seen China set agreements about RMB-denominated trade with Hong Kong and complete currency swaps with Argentina, Malaysia, Indonesia, Korea, Belarus and others. However, so far China has not opened up this discussion on a broad scale across the Taiwan strait. However, as ties between Beijing and Taipei become cautiously warmer — although the government of China-friendly Taiwan president Ma Ying-Jeou was dealt a setback in recent local elections — there are signs that cross-border deals will continue to gain momentum,  perhaps even to the point of Mainland Chinese being able to invest directly in Taiwan property.

As the FT writes today, the idea of a surge of Mainland funds being injected into the Taiwan market is not the impossibility it once was. Over the past few months, Beijing and Taipei have signed three memoranda of understanding that are set to take effect in 2010. From Channel News Asia:

Under the MOUs, mainland Chinese and Taiwanese financial and insurance firms will be allowed to operate in each other’s territory. This will give Taiwanese banks access to the fast-growing Chinese market, so they can seek new growth.

These MOUs will not, of course, be beneficial only to Taiwanese firms. Though Mainland Chinese are still unable to get involved in Taiwan’s current liquidity-fueled property boom, if financial ties (if not political ties as well) continue to warm, the possibility exists that Mainlanders could soon be headed across the straits on property-seeking trips. From the FT:

Billy Yen, Taiwan general manager of property consultancy DTZ, said: “The power of incoming liquidity is already overpowering any market fundamentals.” That is even before a potentially far larger wall of money – that of mainland Chinese investors – has arrived. Chinese buyers are still, with limited exceptions, prohibited from inves­ting in Taiwan property.

“Assuming Taiwan follows Hong Kong’s path [of economic integration with China] … there is still a lot of room to go,” said Mr Yen.

Whether there will be enough demand to sustain Taiwan’s property boom rests on two pending agreements with China: a financial memorandum of understanding that will allow banks to set up branches across the Taiwan Strait, and an economic co-operation framework agreement that will pave the way for further liberalisation in trade and services.

According to another news story today, there are signs that certain services are, indeed, liberalizing further, including tourism. China Economic News Service (CENS) suggests that Taiwan may allow the opening of RMB-based bank accounts once the number of incoming mainland Chinese tourists reach 3,000-5,000 persons daily. Although the number of tourists currently admitted from Mainland China remains hamstrung by legislation that limits them to 3,000 a day, which seems to make the comments made by Sean Chen, chairman of the Cabinet-level Financial Supervisory Commission (FSC), somewhat counterintuitive, the fact that RMB-based bank accounts are being seriously considered is a major step. As the CENS article goes on to explain, the further development of RMB-based accounts depends on several factors, such as market conditions:

Chen said that allowing the opening of RMB-based accounts depends on market needs based on tourism, business exchanges between Taiwan and China. With the financial authorities on both sides having agreed on monetary clearance mechanisms as yet, Chinese mainlanders are not allowed to open RMB-based accounts here.

However, the domestic banks in Taiwan offer RMB currency exchange and Chinese mainlanders can also open non-RMB-based accounts here.

With the eagerness of Mainland businesses to spread to the Taiwan market (as their Taiwanese counterparts have in the Mainland) and the increasing number of free-spending Mainland tourists now crisscrossing the globe (tourists who Taiwanese hotels and retailers would love to accomodate), market conditions shouldn’t be much of a problem. We shouldn’t be surprised if we see these RMB-based accounts becoming increasingly common among Taiwanese banks in coming months and years. However, as always with regard to politics, it’s always premature to make long-term predictions.

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