Beijing’s attempt to make the renminbi a global currency took a step forward on Friday with an agreement that will let banks in Taiwan clear transactions in the Chinese currency.
Establishing Taiwan as an offshore centre for renminbi transactions further cements the growing integration of the two economies while leaving to one side the unresolved issue of the island’s sovereignty.
Taiwan is a much smaller financial centre than Singapore or London – which are also vying to become offshore renminbi centres – but its vast trade ties with China give it a major advantage.
This agreement is the latest in a long string of economic and trade pacts that have drawn Taiwan increasingly closer to China, including a major free trade deal signed in 2010. China is now Taiwan’s largest trade partner.
Although the two have historically been antagonists and Beijing regards the island as a renegade province, relations have warmed since the election of Taiwan’s current president, Ma Ying-jeou, in 2008.
Personal interactions between the two sides have also grown steadily. Chinese students have recently been allowed to enrol in Taiwanese universities, meaning some students are beginning to learn about cross-strait relations from Taiwanese professors. China has also begun letting its citizens visit Taiwan en masse, and more than 2m of its tourists are expected in Taiwan this year, up from 300,000 in 2008.
The renminbi agreement makes Taiwan the second major market after Hong Kong able to clear the renminbi. “We’re not talking about getting a lot of business in one day … but the opportunity we see is actually quite huge,” said Jerry Yang, a banking analyst with Daiwa.
It caps a summer of busy cross-strait activity in the financial sector. Bank of Communications and Bank of China both opened branches in Taipei this summer, making them the first Chinese banks to establish commercial operations in Taiwan. Bank of Taiwan and Mega Bank, the leading Taiwanese bank for foreign exchange, went the other way across the Strait of Taiwan to open mainland branches.
Many of the details of the agreement have not yet been settled, including which banks on each side will handle the clearing, but Taiwan is expected to establish an interbank and spot market for the renminbi to be known as CNT, in line with Hong Kong’s offshore CNH market.
Taiwan’s central bank said the clearing agreement would take effect in 60 days, but analysts predict the new market will not develop as quickly as it did in Hong Kong. Political relations between Taipei and Beijing remain complex, and demand for the renminbi is more tepid now than when Hong Kong opened for business.
“The availability of CNT might create a bit of excitement domestically but the current worsening and uncertain China economic outlook may dampen the investment rush or fast-pace accumulation of CNT for now,” wrote Wee-Khoon Chong, a rates analyst with Societe generale, in a note.
Taiwanese regulators have also not yet indicated what kind of local renminbi products, such as offshore bonds, will be allowed, raising questions about what banks will do with their local renminbi deposits, said Steven Lam, an analyst with Keefe, Bruyette Woods.
In the first half of this year, total trade between Taiwan and China was US$59.5bn, according to Taiwanese government statistics. Given how quickly the renminbi has been adopted in other markets for trade, trade settlement between the two sides of the strait could reach US$12bn a year, said Raymond Yeung, an economist with ANZ.
Donna Kwok, an economist with HSBC, said the agreement with Taiwan offered hope to Singapore and London. It “is a sign of things to come and other offshore renminbi centres will also eventually come to fruition,” she wrote in a note. Singapore has said Beijing will soon authorise one of its banks as a clearing bank.-By Sarah Mishkin and Simon Rabinovitch