Feb. 1 (Bloomberg) -- First Financial Holding Co., Taiwan's fifth-largest financial-services provider, will probably merge this year as the government attempts to start a second round of banking industry consolidations, new Premier Frank Hsieh said.

Taiwan aims to cut the number of financial holding companies by half, to seven, in two years to help them compete with foreign rivals such as Citigroup Inc. and HSBC Holdings Plc. First Financial, whose largest shareholder is the government with a 34 percent stake, owns Taiwan's fourth-largest bank by assets with about 7 percent of the market.

``First Financial Holding Co. will likely become the first merger among financial holding companies,'' Hsieh, who takes office today, said in an interview on Jan. 28. ``We now will accelerate the process to make it happen.''

Standard & Poor's on Nov. 30 cut Taiwan's debt outlook to negative, partly because ``the financial sector continues to be plagued by over-banking, resulting in poor profitability.'' President Chen Shui-bian's push for a NT$1 trillion ($31 billion) financial industry restructuring package is currently stalled in the opposition-controlled parliament.

Four bank mergers have been completed since Taiwan started promoting financial consolidation in late 2001, including Cathay Financial Holding Co.'s acquisition of United World Chinese Commercial Bank and Fubon Financial Holding Co.'s acquisition of Taipei Bank. The two are the largest financial groups by market value on the island, which has 49 banks and about 300 community- level lending associations serving a population of 23 million.

`Problem Restricts Profits'

``We should be able to make it within this year,'' Hsieh said. ``There should be no problem. The banks all know we have a problem that restricts profits.''

In a statement released by Chen's office in October, Taiwan outlined plans to have the top three financial holding companies each cover at least 10 percent of the market.

The government wants to create at least one major ``national champion'' bank that will dominate the industry, Fubon Financial Chairman Daniel Tsai said in an interview on Jan. 27. That would pressure other financial holding companies to merge in Taiwan, he said.

First Financial said it has yet to get the call from the government.

``We are still evaluating the possibility of merging with others, but no concrete plan has been made,'' said Huang Hsien- chuan, executive vice president of First Financial. ``The government still has management control over First Financial, but we have yet to receive any decisive call from the government (about the merger).''

Mega Financial Holding Co., First Financial and six other Taiwan government-controlled banks and financial holding companies will visit Europe and the U.S. in March to seek investors, the government said.

`Stable Relations'

Kaohsiung Mayor Hsieh -- who was chosen by Chen on Jan. 25 as his fourth premier since he took office in 2000 -- also vowed to bolster the economy by improving relations with China.

``To spark our economy, we'll have to solve non-economic, political problems that impede us,'' Hsieh said. ``Stable cross- strait relations will help the economy grow.''

Hsieh, 58, won a second four-year term in December 2002 in Kaohsiung, the island's second-largest city, where he led efforts to improve the drinking water, clean up the city's polluted Love River and accelerate construction of a mass transit system.

Growth in Taiwan's $340 billion economy will be dependent on easing relations with China, Hsieh said. The new premier said he'll urge the two sides to promote diplomacy and stability. Taiwan's businesses, with more than $100 billion invested in China, want to improve transport links with China, such as direct flights and shipping routes.

A China Southern Airlines Co. Boeing 777-200 jetliner carrying Taiwanese home for the Lunar New Year landed in Taipei on Jan. 29, becoming the first mainland commercial carrier to alight in Taiwan since 1949.

Crime Fighting

China Southern is one of 12 carriers from both Taiwan and China that will operate a combined 48 special Lunar New Year nonstop charter flights, under a goodwill agreement by both governments. The first charters, flown two years ago, involved only Taiwan carriers. There was no agreement last year to resume the flights.

One way to build cooperation is for Taiwan and China to work on stopping criminal activity and fraud schemes that harm citizens in both countries, Hsieh said.

Many suspects that commit crimes in Taiwan are hiding in China, Hsieh said. For example, he said, several cell-phone fraud schemes are based in China. Similarly, in Taiwan, there are ``human snakes'' selling mainland Chinese girls to be prostitutes, and drug dealing in China and Taiwan, he said.

``We should cooperate on the crackdown on crimes first as a start'' Hsieh said. ''Political ideologies are much more difficult to reconcile. We'll resolve those issues later.''

Chen's Rule

Relations with China have worsened under Chen's administration. Beijing, which regards the Taiwan as a renegade province, has said the island may be reunified by force should it move toward independence.

Chen, who won a second term in March by a margin of less than 30,000 out of 13 million votes cast, has repeatedly complained that the opposition-controlled parliament has slowed the passage of key bills.

Chen has provoked China during various election campaigns. Last month, in a signal of Taiwan's independence, Chen proposed the removal of ``China'' from the names of state companies and their overseas offices within two years.

The Taiwanese government's foreign offices are officially described as being controlled by the Republic of China. China Airlines, Chinese Petroleum Corp. and China Steel Corp. are three of Taiwan's most prominent state-owned companies.

On Jan. 26, Hsieh said he won't drop references to China in the island's official name, opposing Chen's move.

To contact the reporter on this story: James Peng in Taipei at jpeng7@bloomberg.net

Last Updated: January 31, 2005 18:46 EST