September 7, 2012 / 6:02 AM / 7 years ago

Taiwan-China economic ties to deepen with yuan pact

TAIPEI, Sept 7 (Reuters) - China and Taiwan’s agreement on a clearing system for each other’s currency marks the start of the final stage of an economic integration that has drawn Taiwan closer to its one-time political foe and lifted trade to over $160 billion annually.

The deal on the clearing system after three years of talks brings closer together the two sides’ financial sectors, the last remaining laggard among burgeoning ties in other sectors, though any benefits will take time as full details of the system are yet to be worked out.

Since Taiwan’s ruling Nationalist government adopted a policy of economic opening to China in 2008, business ties have surged and China has overtaken the United States to become Taiwan’s top trading partner.

“The agreement marks the first time that Taiwan-China ties are heading for full-scope development,” said Andy Chang, a professor of China studies in Tamkang University. “It’s strong evidence ties will continue heading to a stable direction with gradual progress.”

Beijing, which claims Taiwan as its own, has enthusiastically embraced the island’s overtures, seeking to use its economic might to draw Taiwan back. But sensitivity in Taiwan over mainland influence in the financial sector has kept ties there behind other industries.

Under the agreement, there will no longer be a need to convert each other’s currency into U.S. dollars first in trade transactions, while Taiwan’s banks will be allowed to offer loans in yuan to entities outside Taiwan.

However, neither side has named a clearing bank and no timetable has been set on allowing companies and individuals to trade the yuan directly, limiting banks’ hopes for meaningful earnings contribution in the short term.

“It won’t happen overnight,” said Andrew Lee, chief financial officer of Taiwan’s EnTie Bank. “But eventually the economic ties will become too close to separate.”

China is planning to make the yuan basically convertible as early as 2015 and, further down the road, turn it into a global currency on par with the U.S. dollar.

The agreement would set Taiwan up for a role in this internationalisation of the yuan, boosting global payments settled in the currency.

About 10 percent of global payments with China will be settled in the yuan over the next six to 12 months, compared with 4 percent, Raymond Yeung, senior economist at ANZ in Hong Kong, wrote in a research note.

Taiwan’s banks have been pushing for the island to become an offshore yuan centre, as they cope with a slow and saturated home market and watch the benefits their Hong Kong rivals have derived from being the first such centre.

Officially reported and approved Taiwan investment in the mainland totalled $41.2 billion from 2008 to 2011, President Ma Ying-jeou’s first term in office, almost two-thirds of the total $58.3 billion in the 16 years prior to his term in office.

One million Taiwanese are estimated to be working on the mainland. (Additional reporting by Michelle Chen in HONG KONG; Editing by Jonathan Standing & Kim Coghill)

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