Taiwan’s Financial Supervisory Commission (FSC) is seeking agreements with Cambodia, Indonesia, Malaysia and Thailand to establish a banking presence in the markets, believed in part to be driven by Taiwan’s upcoming role as a renminbi clearing centre.
The island hopes to service Southeast Asian companies that have an ongoing need for renminbi cash.
FSC chairman Chen Yuh-chang publicly announced Wednesday (October 3) that Taiwan is seeking memorandums of understanding (MOU) with the four countries, in a bid to diversify its banking focus from China and establish an early presence in the emerging markets as their business needs continue to develop.
Banking and currency analysts say that Taiwanese banks a natural fit in Southeast Asia, given product manufacturers based there that supply to Taiwanese companies. They add that Taiwan’s upcoming role as a renminbi clearing centre adds a new dimension to its banking strategy, and one that banks could explore in the emerging markets.
“Up to now the best advantage of being an offshore renminbi centre is to provide funding to Taiwanese businesses and companies that have operations in China,” said Allen Wu, executive vice president at Yuanta Securities. “That’s the main focus, but there will be opportunities in other markets, and there’s a natural link with Southeast Asia because that is where a lot of Taiwan’s manufacturers are. There may be ways that banks can bundle existing businesses with the new renminbi capabilities.”
The logic centres on Southeast Asia’s growing need for renminbi as a trade settlement currency. According to China customs data, the Association of Southeast Asian Nations (Asean) regards China as its largest trade partner.
Bilateral trade rose 26.4% in the first three quarters of 2011 to US$267 billion, and trade between China and the Asean geography is expected to increase 20%-30% over the next three years.
According to Lisa O’Connor, director of renminbi internationalisation at Swift, approximately 80% of Southeast Asian trade with China is still denominated in US dollars, and estimates that 2% could be renminbi-denominated – parallel to global trade settlement figures. Yet this ratio is poised to expand.
According to Swift, trade is settled in renminbi is growing by 14.8% annually, compared to .7% for other currencies. The pickup of renminbi-denominated settlement will add up, and will first be seen in regions that most actively trade with China.
O’Connor notes that China is helping to actively drive greater renminbi settlement as it is a major strategy of internationalising the currency. China’s central bank has released reports that suggest that companies that transact their trades in renminbi receive discounts averaging 2%-3% as it saves the recipient the headache and costs of swapping US dollars into renminbi.
Banks that are able to provide these traders with sufficient renminbi liquidity will see the upside of these developments.
“If you look at Asean as an economic block, it’s an important trading partner of China’s. And the more intra-Asia trade done between Asean and China will create more opportunities for RMB settlement,” said O’Connor. “I can’t say for sure what sort of advantage Taiwan could have, but we have seen that there is a first-mover advantage in establishing RMB corridors, and we’ve seen that for Hong Kong.”
The timing is especially opportune for Taiwan. On August 31 the island signed an MOU with China to establish a renminbi clearing bank in Taipei, which is strongly speculated to be Bank of China’s Taipei branch. This would allow companies to exchange their foreign currencies into renminbi domestically rather than via Hong Kong, which has been the historic renminbi trade settlement hub.
The clearing bank is only the fourth granted worldwide, after Bank of China’s Hong Kong and Macau units and Industrial and Commercial Bank of China (ICBC) in Laos. Specifics of the latter clearing bank are still in development.
While analysts believe that Taiwan’s renminbi clearing activities will centre around local companies looking to expand their China operations, this role may someday expand.
At present, the specifications surrounding Taiwan’s clearing capabilities have not been announced, but as the currency becomes more internationalised the opportunities to trade, lend and conduct business in the currency will also grow.
Southeast Asia presents Taiwan with opportunities to expand its fledgling renminbi business, given that it will continue to be a growing force in China’s trade infrastructure. But the island will have to tread carefully, given the political sensitivities about its relationship with China.
“Right now it’s difficult for Taiwan to play a lead role in the offshore renminbi market because there are a lot of political components that it would have to watch out for. It can’t make formal agreements with counties about providing them with renminbi unless China agrees to it, for example,” said one Greater China economist.
“It’s unlikely that Taiwan’s interest in Southeast Asia is driven by the renminbi angle, but it is a consideration. Taiwan mainly wants to promote its full banking business in Southeast Asia, and this includes renminbi, and this is something that it can do a lot more of in the future.”
Yet analysts say it is important for Taiwan to establish itself now. Many existing companies that settle their trades in renminbi already have accounts routed through Hong Kong. Being able to advertise its services to new clients will help, and Southeast Asia’s emerging markets are a good place to start.
Other countries hope to expand their renminbi presence in the region as well, and such ambitions could become a reality as China’s capital account continues to open and Beijing eases regulation surrounding the currency.
One example is Singapore. The country’s Ministry of Trade and Industry announced on July 6 that one Chinese bank operating in the lion city would be authorised as a renminbi clearing bank for the country.
While no further details of the clearing bank have been announced, analysts say that if Singapore receives clearing licences domestic banks would be able to service the broader Southeast Asian region given their proximity and understanding of the Asean financial landscape. If this is in store, it’s best that Taiwan establish a footprint now.
“Clearly Singapore is going for the same type of angle, but there’s also clearly room for more of these renminbi services in Southeast Asia for markets like Taiwan,” concluded one trade-settlement analyst. “That provides an interesting incentive, and as renminbi trade and settlement increases that can lead to bigger opportunities.”