Taiwan Must Ease Rules to Be Offshore Yuan Hub, SinoPac Says

Taiwan should remove restrictions on mainland China’s companies and its currency so the island can become an offshore hub for the yuan, SinoPac Financial Holdings Co. said.

The island should allow the free entry and exit of the yuan and lift a ban on Chinese companies selling bonds denominated in the currency in Taiwan, said Stan Siao, president of SinoPac, the first Taiwan lender to draw a mainland investor.

“We aren’t a financial center yet,” Siao, whose company is selling a 20 percent stake in Bank SinoPac to Industrial & Commercial Bank of China Ltd., said in an interview in Taipei yesterday. “For us to become one, a certain mindset has to be changed.”

Taiwan is competing with Singapore and London to become a hub for the yuan as China seeks to internationalize its currency. The two sides of the Taiwan Strait have been governed separately since 1949, when the Kuomintang fled to the island at the end of a civil war with Communists in China. Negotiators on both sides pledged economic cooperation in a 2010 agreement.

The island’s banks began taking yuan deposits domestically in February, and Taiwan’s first renminbi debt sale followed the same month. Foreign-currency bond transactions are subject to a yield tax of as much as 15 percent in Taiwan, and Chinese issuers, which accounted for more than 60 percent of Dim Sum debt sales in Hong Kong last year, are barred from the market.

“In the past the two sides were enemies so of course they made a lot of rules and protections,”SinoPac Financial Chief Financial Officer Michael Chang said. “Now that they want to develop relations, they are removing them. We hope they can remove them faster.”

Bond Underwriter

China signed a three-year currency swap agreement in June with the Bank of England for 200 billion yuan ($32.6 billion) to foster yuan trading in London. German central bank board member Joachim Nagel said on July 3 Frankfurt is trying to establish itself as a center for offshore yuan trading in Europe. The People’s Bank of China in May appointed ICBC as yuan-clearing bank for Singapore.

Like China, Taiwan maintains capital controls, restricting the convertibility of the Taiwan dollar. Siao said loosening controls over the flow of yuan in Taiwan would make it a more attractive market.

Good Chance

SinoPac, an underwriter for Taipei-based CTBC Bank Co.’s 1 billion-yuan bond sale in February, said the island must attract both issuers and foreign investors to its market in order to benefit from its advantages over Singapore and Hong Kong.

“We have thousands and thousands of Taiwanese making yuan, paying in yuan, and spending yuan in China,” Siao said. “There’s a very good chance for Taiwan.”

The lender has about 10 percent of the island’s market for yuan deposits, loans and products, compared with about 3.5 percent in the local dollar market, according to Chang.

“Because we were an early mover, our renminbi business is doing much better than local currency,” he said.

Bank SinoPac on July 9 became the first Taiwanese lender to win approval from the China Banking Regulatory Commission to own a banking subsidiary registered on the mainland. Siao said the unit, based in the eastern city of Nanjing, should expedite the growth of its China network. The bank plans to start retail operations in its second year if the first year proves to be profitable.

Lawmaker Ratification

ICBC’s planned NT$20 billion ($671 million) purchase of a 20 percent stake in Bank SinoPac, announced in April, is awaiting ratification by Taiwan’s lawmakers of a services trade agreement followed by regulatory approval. The bank is “pretty optimistic” about the deal’s prospects and seeks to close the cash transaction by year’s end, Chang said.

“The financial part in the services trade pact should get the green light,” Eric Chang, a Taipei-based analyst at Jih Sun Securities said by phone yesterday. “The debate is more on other consumption-related areas.” He has a one-year target price on SinoPac Financial of NT$16.80, or 1.1 times next year’s estimated book value. The shares slipped 0.7 percent to NT$15 as of 11:08 a.m. in Taipei.

Yuan-related business represented “roughly” 17 percent of the bank unit’s net income in the first half of the year, Chang said. In addition to China, the lender is considering following its customers to parts of Southeast Asia such Vietnam or Singapore, potentially through mergers and acquisitions, he said.

“ICBC already has several locations in the Asean nations and we think there could be complementary areas,” Siao said.

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