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Yuan trade is no longer politically taboo for Taiwan but allowing over-the-counter foreign exchange business is merely a small step in a long march toward becoming a trading centre for China's currency.
- By Lee Chyen Yee, Reuters
- Published: 00:04 August 2, 2008
Yuan trade is no longer politically taboo for Taiwan but allowing over-the-counter foreign exchange business is merely a small step in a long march toward becoming a trading centre for China's currency.
Taiwan, which China sees as its own territory, is keen to expand business ties with its largest trading partner and has been implementing a series of measures to improve relations with the booming mainland under its newly-elected president.
To create a viable marketplace for the yuan, available only in China and Hong Kong up until now, analysts say Taiwan must eventually permit banks to offer a wider variety of services such as yuan-denominated bank and credit card accounts.
Data shows Taiwan invested $65 billion in China from 1991 to 2007 but some put the figure at more than $100 billion due to Taiwan capital that is routed indirectly to China through third parties.
"I've been using banks in Hong Kong and China for my currency and investment needs for my business all these years," said David Lee, chairman and CEO of Kingcan Holdings Ltd, a Taiwanese metal packaging company.
"The latest currency policy is positive news for us, but banks in Taiwan will have to offer more yuan-related services before I consider putting my money in them," Lee said.
Investors want to hold and trade yuan, which has appreciated about seven percent this year, but the currency is not fully convertible and the mainland still controls money flows.
Green light
In late June, the government gave the green light for over a dozen Taiwanese banks to conduct Taiwan dollar-yuan exchange services to accommodate millions of Chinese expected to visit the island under a new tourism agreement.
Lenders such as Bank of Taiwan, Taiwan Cooperative Bank and banking units of Mega Financial have since then set up outlets at airports and top tourist spots, hyping the services in big red banners at their new counters.
Small potatoes
Despite the hype, exchange volumes in the first few weeks have been miniscule, providing only a tiny fraction of the transaction volumes needed to create an efficient marketplace.
As of mid-July, Taiwan's banks and foreign currency exchange bureaux sold just 238 million yuan and bought 102 million yuan, adding up to the equivalent of a meagre $50 million, government data showed.
Taiwan's own Taiwan dollar market averages $1 billion or more in daily volume alone.
Without sufficient liquidity, buyers face the risk of being unable to get the Chinese currency in sufficient volumes at market prices when they need it.
The market could become vulnerable as Taiwan slowly ratchets up the volume of Chinese visiting the island under a new tourism deal, potentially straining the system.
"The current system won't be able to support that kind of flow," said Tony Phoo, an economist at Standard Chartered Bank. "You need to open up credit business to allow Taiwan dollar-Chinese yuan conversion. You need to run a proper yuan business, that is with deposits."
Taiwan is already moving toward more diversified yuan services besides simple cash exchanges.
China and Taiwan must sign a formal currency settlement deal for Taiwanese banks to offer different yuan services, but that may be held back by political sensitivities.
Lawmakers and analysts said Taiwan should go one step at a time, such as allowing banks to accept yuan deposits, which will not need a bilateral formal settlement agreement.
"Political problems are bound to arise, but China and Taiwan should be more flexible and practical when discussing such issues to push ahead with more opening," said Wu Chung-shu, an economist at Academia Sinica.
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