Bank of Taiwan Chairman Burnishes Bid to Clear Yuan Transactions

Bank of Taiwan Chairman Liu Teng-Cheng
Liu Teng-Cheng, chairman of the Bank of Taiwan. Photographer: Maurice Tsai/Bloomberg

Bank of Taiwan’s role in implementing government policy bolsters its case to be the island’s first lender allowed to clear transactions in yuan, Chairman Liu Teng-cheng said in an interview.

The central banks of Taiwan and China are discussing an agreement that would allow settlement of transactions on the island in the Chinese currency as relations warm between the former rivals. The agreement would allow banks to meet rising demand for yuan from Taiwanese companies with growing businesses in the world’s second-biggest economy, Liu said in Taipei, where the lender is based.

“We have long-term experience of carrying out government policies and now we have a branch in Shanghai,” said Liu, who is also a member of the Taiwanese central bank’s monetary policy board. “If they take into account we are 100 percent owned by the government, maybe we can shoulder the job.”

Taiwan joins Singapore and London in seeking to become locations where companies can raise yuan to fund their investments and operations in China. Sales of bonds denominated in the currency in Hong Kong, the first region outside China able to clear transactions in yuan, surged fourfold last year from 2010, data compiled by Bloomberg show.

“Just like Singapore and Hong Kong, Taiwan sees opportunities in yuan internationalization,” said Wang Aochao, head of research at UOB Kay Hian Investment Consulting (Shanghai) Co. “Taiwan also wants to get on the big boat.”

China Expansion

Taiwanese companies including Foxconn Technology Group, Quanta Computer Inc. and Uni-President Enterprises Corp. have invested more than $117 billion in China, initially building factories to take advantage of lower wages and then to tap surging consumer spending powered by a 90-fold increase in the the economy over the past three decades.

Bank of Taiwan, the island’s largest by assets, also plans to open more outlets in China, Liu said in the July 31 interview, identifying the cities of Chongqing, Chengdu and Tianjin as locations where the lender wants to expand. It’s also considering setting up a subsidiary in China, he said.

“Being a bank with a long history, we know many local companies well,” Liu said. “Their units in China are more willing to do business with those they are familiar with. That’s our advantage.”

Bank of Taiwan, which is responsible for businesses related to the distribution of the island’s currency and manages deposits for the military and civil service retirement funds, was first established in 1899 when the island was a Japanese colony.

It was restructured in 1946 after China’s Kuomintang-controlled government took sovereignty of Taiwan. Three years later, the Kuomintang fled to the island after its defeat by the Communist Party on the mainland.

Ruled Separately

Taiwan has been ruled separately since then, with the Communist Party claiming the island as a renegade province that should be unified with China by force if necessary.

Relations have improved since Ma Ying-Jeou, who advocates closer China ties, was elected president in 2008, replacing Chen Shui-bian, who supported greater independence for the island. Taiwan and China have opened air links and eased investment restrictions since Ma took office.

Tsai Ing-wen, who Ma defeated this year to win re-election, is among those who’ve criticized his policy of closer China ties as hurting Taiwan’s sovereignty.

Two-way trade between Taiwan and China rose 10 percent last year to $160 billion, with the island recording a trade surplus of $78.7 billion.

Taiwanese central bank Governor Perng Fai-nan said in June that it was in final talks with the People’s Bank of China to sign a deal that would allow settlement of yuan transactions on the island. Such transactions conducted by Taiwanese banks must currently be settled through Hong Kong.

Clearing Banks

Two clearing banks may be named for transactions in Taiwan, with one chosen by the China and the other selected by the island’s authorities, according to Christine Kuo, a vice president at Moody’s Investors Service.

“Appetite for yuan from companies and individuals is increasing due to closer investment relations,” Liu said. “We’re confident of providing services immediately if we are appointed as a clearing bank.” He added that talks for yuan clearing between the central banks have gone “smoothly.”

The agreement would open more businesses to banks in Taiwan, where competition between 37 local lenders, 32 foreign competitors and more than 300 credit associations has narrowed margins. HSBC Holdings Plc, the top underwriter of yuan-denominated bonds in Hong Kong, arranged the sale of 24.8 billion yuan of the so-called Dim Sum debt in the first six months, a 25 percent increase from a year earlier, according to data compiled by Bloomberg.

Yuan Deposits

Yuan deposits in Hong Kong totaled 557.7 billion yuan at the end of June, the city’s monetary authority said July 31. That amounts to about 10 percent of total deposits, and based on that level, Taiwan’s yuan savings may exceed 600 billion yuan once an agreement with China is forged, Liu said.

Other regions are also seeking similar agreements with China. U.K. Chancellor of the Exchequer George Osborne discussed the development of a yuan market in London with Chinese officials when he visited Beijing in January. Singapore announced in July that China was allowing a Chinese bank to offer yuan clearing services in the southeast Asian nation.

In addition to China, Bank of Taiwan is also planning to open branches in Sydney and Vietnam and a representative office in Mumbai, Liu said. The lender already has branches in Hong Kong, New York, Tokyo, London, Los Angeles, South Africa and Singapore along with 163 branches in Taiwan. It opened its Shanghai outlet on July 10.

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