Taiwan stands to benefit from the liberalisation of mainland investment rules and closer political ties. The island’s potential as an offshore renminbi market is huge. Is Taipei about to challenge Hong Kong’s dominance of the CNH market?
Source: Reuters/Nir Elias
A worker paints a road sign inside a residential compound in the centre of Shanghai
China and Taiwan, the self-governed and democratic archipelago that Beijing claims as its own, do not appear to be the closest of allies. The mainland has an estimated 1,500 missiles aimed at Taiwan.
For their part, Taiwanese residents regularly have to participate in air-raid drills, standing outside their schools, homes and offices as sirens wail, reminding them that peaceful relations with the large neighbour across the Taiwan Strait are never assured.
Still, Taiwan and China are major trading partners and their financial relationship is increasingly close. Taiwanese President Ma Ying-jeow, who won his second term in office in January, has pursued a policy of political independence alongside economic co-operation. Taiwan wants to govern itself, but without missing out on China’s rapid growth.
It is against this backdrop that Taiwan is set to follow Hong Kong and embrace the e renminbi. The vast community of Taiwanese businesses will greatly welcome such a move as they count mainland China as their largest customer or supplier.
Also, as Taiwan already boasts a bond market bigger than those of Hong Kong and Singapore, there is potential for a version of Hong Kong’s Dim Sum market to spring up in Taipei. Taiwanese insurers are already major purchasers of Dim Sum bonds sold in Hong Kong.
Although developments are still in their infancy, the Central Bank of the Republic of China, Taiwan’s central bank, is talking to the People’s Bank of China about how to introduce offshore renminbi bonds.
“We are in very close discussions with the PBoC,” says Song Qiu-lai, deputy director of foreign exchange at the Taiwan’s central bank.
Song adds that civil servants on both sides of the Taiwan Strait are ironing out plans for the introduction of the offshore renminbi in Taiwan “that both our central bank and the PBoC can accept”.
While it is currently permitted for offshore account-holders in Taiwan to hold renminbi, these offshore deposits currently stand at a miniscule Rmb13bn, according to central bank data.
However, if Taiwan’s government gives domestic banks permission to accept renminbi, the deposit base could quickly grow much larger as Taiwanese companies will be permitted to accept renminbi payments from their Chinese customers.
“Interest rates in Taiwan are very low and its insurance companies have lots of funds to invest”
Bilateral trade between China and Taiwan reached US$160bn last year, according to data from ANZ. This was almost half as much as trade between China and Japan, which came in at US$345bn in 2011.
Meanwhile, exports from Taiwan to the mainland reached almost US$35bn in 2011, more than doubling the level in 2005, according to figures from BBVA. The figures exclude Taiwanese exports to Hong Kong.
Song, of Taiwan’s central bank, would not divulge any further details from his department’s discussions with the PBoC, saying this would be inappropriate ahead of any government announcement.
However, economists who have studied the issue expect Taiwan to follow initially the methods used in Hong Kong to introduce offshore renminbi. Hong Kong’s leading position in bringing the renminbi to the world is recognised in the currency code CNH.
In December 2003, Beijing named Bank of China’s Hong Kong branch as the sole offshore clearing institution for the renminbi. Shortly afterwards, Hong Kong individuals were permitted to hold renminbi deposits in local banks.
The PBoC set up the first currency swap line with Hong Kong in late 2009 to ensure depositors in the SAR could withdraw renminbi whenever they wanted without the Hong Kong institution running out of the Chinese currency.
Hong Kong’s so-called Dim Sum market grabbed more attention in mid-2010, when China eased more regulations on the use of its currency outside its borders, essentially making it tradable under certain conditions.
Like Hong Kong, says BBVA economist Le Xia, Taiwan will have to open its doors to a renminbi-clearing bank from the mainland, and establish a swap line with the PBoC to ensure liquidity.
After that, he anticipates, Taiwan’s version of the renminbi market will be somewhat different to Hong Kong’s because they have markedly different economic relationships with the Chinese mainland.
Hong Kong has its dominant investment industry. So, unsurprisingly, Hong Kong’s Dim Sum bond is now seen mostly as an investment product. After Hong Kong banks built up their renminbi deposit bases, Xia explains, institutions and individuals from all over the world purchased CNH from these banks, either to invest in Dim Sum bonds, or simply to hold the Chinese currency on expectations of its appreciation.
Taiwan is more likely to use the renminbi for trade than for investment, Xia says: “The relationship between Taiwan and mainland China has more to do with trade.”
Taiwan’s technology firms have a long history of operating manufacturing facilities in China. For example, Foxconn, the Taiwanese company responsible for building Apple’s products, has been producing goods across the strait since 1988.
Xia says this means that, once offshore renminbi deposits begin building up in domestic banks, companies, rather than investors, are more likely to use the currency to fund their mainland Chinese operations or purchase goods from China.
Raymond Yeung, a Hong Kong-based economist at ANZ, explains: “If some of the Taiwanese companies’ trade with mainland China can be invoiced and settled in renminbi, it will make life a lot easier for them. They can buy inputs, pay wages and receive payments, all in renminbi, instead of having to trade in US dollars with China.”
However, this does not preclude Taiwan building its own version of a Dim Sum bond market, or of its banks offering retail investors products denominated in renminbi.
“Interest rates in Taiwan are very low and its insurance companies have lots of funds to invest,” points out Song, the central banker. “So, investors here are very interested in renminbi bonds.”
Indeed, Taiwanese investors and corporations are already participating in Hong Kong’s Dim Sum market.
Advanced Semiconductor Engineering, a Taiwanese chipmaker, issued a Rmb650m Dim Sum bond in Hong Kong last September. It paid a coupon of over 4%, much higher than a similar deal issued in Taiwanese dollars would have offered at the time. Taiwanese investors were mainly the buyers of the bonds.
Taiwanese funds have also not restricted themselves to buying local names in the Dim Sum market.
Terence Chia, a director on Citigroup’s debt syndicate desk in Hong Kong, says Taiwanese investors took up over two-thirds of China Development Bank’s Rmb1.5bn in 15-year Dim Sum bonds, issued in January this year and paying 4.2%.
Taiwan may not need to come up with its own version of a Dim Sum bond market because it is easy enough for corporations to issue such debt in Hong Kong.
Still, Taiwan’s banking industry may wish to take advantage of any build up in renminbi deposits in local accounts by persuading local corporations to issue renminbi debt in Taipei, in deals that domestic institutions will co-ordinate.
“The public perception of a mainland government entity raising money in Taiwan may not be very high”
“A bond is not a physical asset. The paper can be bought and sold any place where you can hold a roadshow. So, the idea of bonds being issued in this or that geographical location is illogical,” points out a Hong Kong-based senior debt capital markets banker.
“However, it is no great stretch of the imagination to predict that Taiwanese banks – or the Taiwan units of investment banks – will heavily market a local version of Dim Sum and install themselves as co-ordinators and bookrunners.”
Taiwan, however, is unlikely to tempt international renminbi bond issuers or buyers, says ANZ’s Yeung, because Taipei “does not have the same capital market infrastructure as Hong Kong.”
He is referring to Hong Kong’s well-established Western investor base, the quality of English spoken by its professional community and its British-style legal system, features that Taiwan cannot boast about.
BBVA’s Xia also points out that high-profile issues from mainland Chinese Government departments and state-owned enterprises popularised Hong Kong’s Dim Sum market. Among them was the Ministry of Finance’s Rmb6bn issue in October 2009, which was three times oversubscribed.
Given that Taiwanese nationalism is alive and kicking, it is questionable if Ma Ying-jeow’s Kuomintang Government would risk a political backlash by encouraging state pension funds to funnel savers’ cash into the Beijing administration’s coffers. The pro-independence Democratic Progressive Party won 46% cent of the votes in the January elections.
“The public perception of a mainland government entity raising money in Taiwan may not be very high,” says Xia. “I do not think there will be much political appetite for such a deal very soon.”
However, from a trade perspective, ANZ economist Yeung concludes that “the offshore renminbi market has the potential to grow very fast in Taiwan.”
Also, the establishment of a renminbi bond market in Taipei cannot be ruled out. London and Singapore are striving to create their own Dim Sum recipes. Taiwanese bankers are just as inventive as any of their counterparts abroad, when it comes to the marketing and packaging of financial products that already exist elsewhere.
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