beyondbrics

China vice premier Li Keqiang’s visit to Hong Kong has stirred excitement not only in the city but also in Taiwan, where an increasing number of people are asking: why can’t Taiwan be a renminbi trading hub too?

Among the advocates was Daniel Tsai, chairman of Fubon Financial, one of Taiwan’s biggest banking groups, who told mainland Chinese reporters recently that Taiwan’s government has not recognised the rise of the renminbi and “so all the relevant policies are made reactively and passively.”

Like Hong Kong, Taiwan’s businesses have strong ties to mainland China and many business dealings are made using the Chinese currency. Yet the arguments in Taiwan for why the island should become an renminbi trading hub are slightly different from that of Hong Kong.

Unlike the former British colony, there is no huge inflow of renminbi entering Taiwan, despite the recent political warming that has seen gradual liberalisation in regulations and a burgeoning flow of mainland Chinese tourists.

Instead, Taiwan’s need for renminbi-denominated investment options stem from the fact that the island’s traditional export trade has meant that its merchants were receiving payments in US dollars while paying out costs in renminbi. With the US dollar falling and the renminbi rising, Taiwan needs hedging options more than yield-boosting investment options.

The central bank appeared to recognise as much when it held a press conference last week explaining that it was not opposed to Taiwanese companies settling their trade payments in the Chinese currency.

Chou A-ding, deputy central bank governor, said Taiwan had “a tacit agreement” with Beijing to begin talks within this year to establish an renminbi clearing and settlement mechanism. This would be a significant next step towards helping Taiwanese banks do more business in renminbi, after the Financial Supervisory Commission in May allowed Taiwanese banks’ foreign branches and offshore banking units (OBUs) to handle the Chinese currency.

But Chou cautioned against expecting too much from the talks, given that it took nearly a year for the two sides to hammer out a deal that allowed Taiwanese banks to directly source bank notes from Bank of China in Hong Kong.

Whether an agreement is reached or not “is not entirely up to me,”  Chou said. As with most cross-Strait negotiations, Rmb-TWD convertibility is probably something that investors shouldn’t hold their breaths for.

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