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Fitch: Taiwan Banks' Pivot from China Has Lowered Contagion Risk
February 6, 2017 / 4:57 AM / 10 months ago

Fitch: Taiwan Banks' Pivot from China Has Lowered Contagion Risk

(The following statement was released by the rating agency) TAIPEI/SINGAPORE, February 05 (Fitch) Taiwanese banks have reduced their direct exposure to mainland China in the last two years, which puts them in a stronger position to deal with contagion risks stemming from China's debt overhang, pressure on the renminbi, or a potential deterioration in cross-border relations, say Fitch Ratings. The mainland China exposure (MCE) of Taiwanese banks had fallen to around 6.2% of system assets by end-2016, down from a peak of 8.4% at end-2014. This shift away from China is likely to continue. Taiwan's regulator has capped banks' permitted exposure to China at 100% of their equity, and is unlikely to relax that limit in the near term. State banks are under pressure to limit growth in their China exposure, and would come under government scrutiny were they to pursue rapid expansion in the mainland. Moreover, the incentive to increase exposure to the mainland will continue to be limited by slower growth in China and cooler cross-strait relations since the new Taiwan government took charge in May 2016. Taiwanese banks are also now in a stronger position to weather volatility in the renminbi than they were a few years ago. Sales of target redemption forwards (TRF) - a structured derivative product which some investors have used to hedge renminbi exposure and to speculate on currency moves - have fallen significantly from their 2014 peak. We expect sales to remain subdued, reflecting stricter regulation on mis-selling and speculation as well as the more uncertain outlook for the renminbi. Most banks now have a neutral position with respect to the renminbi, and Fitch estimates that the potential losses from TRFs would be small relative to bank earnings - even if the renminbi were to depreciate more sharply than we currently forecast. We would now expect the bigger impact on Taiwanese banks from a Chinese shock to be felt indirectly, through the repayment capabilities of Taiwanese borrowers. Exports to China and Hong Kong represent nearly 40% of Taiwan's total exports, and mainland China acts as an important production hub for Taiwanese manufacturers. The pivot away from China has coincided with a push into emerging markets (EM) across the rest of Asia-Pacific (APAC) - particularly Cambodia, Vietnam and the Philippines - as banks have sought to capitalise on rapid economic growth and high yields. EM APAC (excluding China) exposure is still only equivalent to 2.3% of system assets, but it grew by an average of around 20% per year over 2015-2016. The Taiwanese authorities are pushing for further increases. Taiwan's regulator has planned an increase in banking lending to 18 economies across APAC, as part of a 'New Southbound Policy' announced in December 2016. Fitch expects lending to the Association of Southeast Asian Nations (ASEAN) to rise particularly sharply, by around 8% growth per year in 2017-2020, compared with growth of around 3% per year in domestic lending in 2014-2016. Aggressive expansion in EM APAC is helping to diversify bank exposures away from China, but could create its own pressure on Taiwanese banks' loan quality, given that these markets are generally characterised by weak governance and a lack of transparency. Contact: Cherry Huang Director Financial Institutions + 886 2 8175 7603 Fitch Australia Pty Ltd, Taiwan Branch Suite 1306, 13F, 205, Tun Hwa North Road Taipei City, Taiwan Jonathan Lee Senior Director Financial Institutions +886 2 8175 7601 Dan Martin Senior Analyst Fitch Wire +65 6796 7232 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email:; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. 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Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. 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