Chang Chingyuang: The Development of Offshore RMB Market in Taiwan and Its Implications

2015-07-09 IMI

Chang Chingyuang: Chief Strategy Officer, SinoPac Holdings This report intends to explain how monetary cooperation may be mutually beneficial to both sides of the strait, and to appeal to regulators on future policy development; Taiwan supports China on its effort at RMB internalization while China participates in building Taiwan as an offshore RMB center. This report will first point out why developing offshore RMB market in Taiwan has special meanings to China and its objective conditions and neccessities to Taiwan. The report will then conclude with stating ongoing projects and specifying long-term goals. I.The significance of developing offshore RMB market in Taiwan The following five reasons highlight the significance of why making Taiwan an offshore RMB center has particular meanings to China when compared to other places: 1. Close-knit relationship based on real economy The 2014's Report on Internationalization of RMB advocates that internationalization of RMB should be promoted based on real economy. According to statistics, total trading amount cross-strait in 2013 reached US$197.3 billion, 4.7% of total trades in China, making Taiwan its fourth largest trading partner. At the same time, China’s trade deficit to Taiwan reached US$115.9 billion in 2013, ranking first and accounted for 19% of total volume. In addition, number of tourists traveling cross-strait has grown every year. In 2013, 5.16 million people traveled from Taiwan to China, 2.87 million people traveled from China to Taiwan. Taiwan's direct investment in China ranks the highest, which has made significant contributions to China’s employment, technological advancement and production efficiency. By replacing the use of US dollars with RMB in tourism, trade, and investments, China’s cost of funding and mitigating foreign currency risks will be greatly reduced hence significantly enhance overall business competitiveness. 2. Taiwan has inherent qualifications of becoming offshore RMB center, easy execution and sustainable Because of Taiwan's stable trade surplus with China caused by industry structure, plus the increasing number of tourists from China, settlements done using RMB can naturally bring cash into Taiwan. Since Taiwan also has a vast amount of interest in direct investment and tourism to China, a natural utilization of RMB is created. Moreover, the higher yield enjoyed by onshore RMB increases the desire of Taiwan making financial investments in China, forming a complementary relationship adaptive for different economic cycles. 3. Taiwan fully capable of promoting the three functions in RMB internationalization Large scale of cross-strait trading, tourism, direct and financial investments, and long-term trade surplus builds a strong basis for Taiwan to promote offshore RMB payment, investment, and savings. China can observe the transformation of RMB utilization through Taiwan’s experience and formulate comprehensive and solid RMB internalization policies and strategies. 4. Taiwan, hub of RMB circulation In 2013, Taiwan ranked 20th and 18th in total exports and imports of goods globally, and held a monumental reputation in the semiconductor industry and many industrial products. Taiwan's trade surplus was approximately US$35.4 billion in 2013; foreign reserve was US$421.6 billion as of end of May 2014, ranking fourth in the world. An active capital market, mature and sizable stock and bond market can also support the supply of RMB products. Most importantly, through the extensive supply chain and the investment network that is formed by Taiwan corporations abroad, RMB circulation can be greatly expanded. 5. Extend financial services to SMEs, from Taiwan to China There are more than 80 thousand Taiwanese SMEs in China. The RMB capital pool accumulated by Taiwan’s financial institutions can effectively solve the liquidity issue faced by many of these SMEs. For the SMEs that still have difficulties gaining access to funding can potentially solve the problem via direct financing by issuing RMB denominated debt instruments and stock. With time, these financial services and experiences with direct financing will become available to Chinese SMEs. II. Conclusions and Implications Taiwan and China not only share geographic proximity, but also have very similar cultural backgrounds. Given such close relationship, the successful promotion of RMB utilization becomes ever more necessary if China intends to extend the use of RMB in other regions. It is important to acknowledge markets other than large corporations and financial institutions, as most institutional investors are extremely sensitive to interest and exchange rate fluctuations, causing instability to the progress of RMB internationalization. Instead, markets such as Taiwan, that is fundamentally built upon SMEs and individuals should be favored on the stability and sustainability in development of RMB usage. Thus, we call for: (1) Taiwan supporting China on the promotion of RMB internationalization; and China participating in building Taiwan as an offshore RMB center. (2) The signing of a currency swap agreement between Taiwan and China as soon as possible to promote direct exchange of currency. (3) Cross-strait collaboration in promoting a friendly environment for direct usage of RMB. We hope to accelerate the speed of RMB internationalization with the support of policies formation, including: (1) encouraging Taiwanese financial institution in China to issue RMB denominated debt and CD in Taiwan, (2) opening up of RQFII quota and allowing Chinese banks make financial investment in Taiwanese financial institutions by disengaging Cross-Strait Service in Trade Agreement from the financial industry and (3) within a manageable range, providing a convenient way for individuals from Taiwan to invest in real estate in China using offshore RMB. By accumulating RMB assets in Taiwan and settling trades in RMB, we can further integrate and evolve the trade structure in Asia. It will allow us to form a stable multi-currency system to optimize Asia’s regional economic development by lessening our reliance on western currency. In conclusion, we should be motivated to promote and support the internationalization of RMB as well as the development of Taiwan’s offshore market. Share the responsibility for regional integration and the development of a sound monetary system.

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Chang Chingyuang: The Development of Offshore RMB Market in Taiwan and Its Implications

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