Reclaiming lost ground

Guo: plans to open in Taipei

Last year, Chinese banks provided Taiwanese companies with loans worth more than Rmb230 billion ($34 billion). Most of these companies are doing business in China itself, a market Taiwan’s banks traditionally found off-limits.

This is set to change: the island’s banks will now be allowed to provide financial services in renminbi to Taiwanese companies that operate in China, the Association for Relations Across the Taiwan Straits announced last week.

The latest moves come six months after the Taiwan government approved measures also allowing the banks to set up branches in the mainland, as well as to buy into their Chinese counterparts.

For the island’s bank bosses, this is an important opportunity. “Many of the best, fastest growing, and most profitable customers have gone to the mainland and the financial industry is running to those clients. Once it is open, we hope to win back lost business,” a spokesman for China Development Financial Holdings, one of Taiwan’s largest financial institutions, told Guangzhou Daily.

Acquiring access to this key client-base will boost the financial industry back home. Strong loan demand and higher returns on capital on the mainland should help offset some of the lower margins in Taiwan’s highly fragmented domestic market.

The changes will come slowly. Under the agreement, Taiwan banks will be allowed to conduct business in the yuan currency once they establish a branch on the mainland for one year. They can also apply to offer yuan loans to mainland-based Taiwanese companies if the bank branches are profitable after that first year of operation.

No surprise, then, that one foreign analyst predicted to Bloomberg that the new rules will not produce “anything solid” for two years.

But Taiwan’s banks are already preparing to leap into the Chinese market.

Last week, the Taiwanese financial regulator approved the applications of four banks that want to establish branches. The lenders must now get approval from the Chinese regulator, but hope to be open for business before the end of the year, reports Caijing.

The spirit of financial cooperation is also flowing in the opposite direction across the Strait, with Chinese banks seeking to set up shop in Taiwan.

Bank of China has already applied to set up a branch in Taipei, which will mostly provide corporate finance services. The bank will likely leverage its extensive experience of doing business with firms from Taiwan: 80% of Taiwanese businessmen in China are Bank of China customers, reports 21CN Business Herald.

China Construction Bank is also planning to cross the Strait: the bank’s chairman, Guo Shuqing, told journalists that “it is in the interests of both us and our clients,” although it has not yet decided whether it will enter the market by opening a branch, establishing a joint venture, or by purchasing a stake in a local bank.

While China’s largest banks have the resources to become major players in the Taiwanese market (regulators permitting), Taiwanese banks, due to their smaller size, will face a harder time.

That is also going to make M&A more challenging, especially when it comes to buying into their Chinese counterparts. A stake in a top-tier municipal bank will come with such a high price tag that Taiwanese banks may have to be satisfied with buying into less prestigious banks in second or third-tier cities, says China Economic News Service.

Nor should they take too long in picking their investment targets, the newspaper adds. The window of opportunity for creating a partnership with a local bank will probably only be open for another three years.

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