Taiwan Signs Yuan Clearing Deal With China, Creates New Rate

Taiwan Signs Yuan Clearing Deal With China, Creates New Rate
China has been expanding its currency relations with trade partners to promote greater use of the yuan in global trade and investment. Photographer: Nelson Ching/Bloomberg

The central banks of Taiwan and China signed a yuan clearing agreement as Asia’s biggest economy pushes the use of its currency in international trade.

Taiwan will allow interbank trading of the yuan, creating a new exchange rate for the currency, Governor Perng Fai-nan said today. The two monetary authorities are also negotiating a currency swap deal that would allow Taiwan to hold yuan assets in its foreign-exchange reserves.

“The deal will help Taiwanese companies move their yuan assets back to the mainland and lessen their exchange risks,” Perng said in Taipei. “Taiwan will have its own yuan spot rate called `CNT,’ as opposed to `CNH’ in Hong Kong.”

China has been expanding its currency relations with trade partners to promote greater use of the yuan in global trade and investment. Nations including Singapore, Japan, and Thailand have signed similar deals with the world’s second-biggest economy as part of their efforts to reduce reliance on the dollar. Exports account for more than two-thirds of Taiwan’s economy and some 30 percent of shipments are bound for China.

“It’s a good development as there’s huge demand for yuan in Taiwan,” said Penny Chen, who helps oversee $160 million in yuan assets as a fund manager at Manulife Asset Management Co. in Taipei. “Taiwan’s exporters and small-to-medium enterprises will be able to reduce transaction costs.”

Taiwan has the world’s biggest trade surplus with China and foreign direct investment by the island’s companies rose 11 percent to $13 billion in 2011, according to official data. The island has maintained self-rule since Chiang Kai-shek’s Kuomintang party fled the mainland in 1949 after losing to Mao Zedong’s Communists in a civil war.

Relations across the Taiwan Straits have thawed since President Ma Ying-jeou came to power in 2008 and the two sides signed trade accords. He won his second term in an election in January.

Expanding in China

Companies including Uni-President Enterprises Corp. have raised funds in yuan in the past two years to meet trade-related payments, build factories and tap surging consumer spending powered by a 90-fold increase in China’s economy over the past three decades.

A unit of the instant-noodle maker borrowed 1 billion yuan ($158 million) for three years in July, while Chailease Finance BVI Co., a unit of the island’s biggest commercial finance company, raised 750 million yuan through a sale of three-year bonds in Hong Kong in March.

“We see high demand for the yuan from corporates as they need it for trade settlement with Chinese companies,” Liu Teng-cheng, chairman of Bank of Taiwan, said in an interview on July 31 in Taipei. “Individuals and companies also expect the currency to appreciate.”

New Yuan Spot

The agreement may lead to the transfer of yuan liquidity to Taiwan from Hong Kong, which was designated by China as an offshore center for trading in 2010, Dariusz Kowalczyk, senior economist and strategist at Credit Agricole CIB in Hong Kong wrote in a note today.

“The deal will likely allow development of the offshore deliverable market in Taiwan across asset classes, and create more arbitrage opportunities for the onshore and offshore yuan curves,” Kowalczyk wrote. “We believe there may be some withdrawal of yuan liquidity from Hong Kong to Taiwan as a result.”

The yuan traded in Shanghai has weakened 0.9 percent this year, after strengthening 31 percent from when it was revalued in July 2005 through last year. The Chinese currency in Hong Kong traded at a premium of as much as 2.6 percent in October 2010, and today traded at a discount of 0.1 percent.

Yuan Center

Taiwan accounted for 2.6 percent of trade settled in yuan as of January, after Hong Kong and Singapore, Alicia Garcia-Herrer, a Hong Kong-based economist at Banco Bilbao Vizcaya Argentaria SA wrote in a report in April.

Apart from Taiwan, Singapore and London are also seeking to become locations where companies can raise yuan to fund their investments and operations in 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.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE