Commentary

Cross-strait currency settlement mechanism a boon for both sides

(CNA photos)

• Publication Date：07/08/2012
• Source： Economic Daily News

Consensus has been reached on the basics of a cross-strait currency settlement mechanism, and results are expected soon from substantive talks. If politics can be kept out of the negotiations, agreement will be reached that much earlier, for the good of both Taiwan and mainland China.

Mechanisms governing cooperation in the oversight of banks, stocks and insurance have already been established, but currency settlement remains in the trial stage. Currently, Taiwan’s designated foreign exchange banks can exchange Chinese yuan, but cannot handle deposits or loans. Overseas branches and offshore banking units are allowed to offer yuan accounts to foreigners and institutional investors, but not to Taiwan residents.

As these operations involve currency supply, they must go through either the Bank of Taiwan or Mega International Commercial Bank Co. Ltd. to obtain yuan notes via mainland China’s Bank of China Hong Kong branch. Moreover, the banks cannot undertake interbank loans in yuan, but must exchange the currency through overseas branches. Similarly, in mainland China New Taiwan dollars can only be exchanged in six cities in Fujian and Guangdong provinces.

Arrangements for a currency settlement mechanism lag far behind the rapid development of two-way cross-strait trade, which now stands at more than US$150 billion. Mutual investment continues to grow, with Taiwan’s accumulated mainland investments topping US$110 billion, while over 6 million people are involved in two-way business and tourism visits annually, creating ever growing demand for currency exchange.

Allowing banks on both sides to handle deposits, loans and remittances would create much greater convenience and cut processing costs. Based on last year’s total trade volume, as much as US$1 billion to US$1.5 billion could be saved, to the profit of people and businesses in both Taiwan and mainland China.

Such a system would give importers and exporters another choice for making and receiving payments, and minimize the risks of losing money in indirect exchange through U.S. dollars. Taiwan’s designated banks could arrange yuan deposits and loans, and also deal in financial derivatives, providing clients with a variety of products.

Paul Cheng-hsiung Chiu, chairman of Bank SinoPac, using the Bank for International Settlement’s procedures, has calculated that the value of Taiwan’s annual foreign exchange and financial derivatives is roughly nine times that of imports and exports. The range of business opportunities for the financial sector is substantial.

Once the mechanism is in place, mainland Chinese businesses and individuals will also benefit, and even more importantly for Beijing, it will expand offshore yuan transactions, thus contributing to the currency’s internationalization. If Taiwan, with its solid industrial base, economic strength and well-developed overseas markets, can join Hong Kong as an offshore center for yuan transactions, it would be a tremendous boost for the currency.

Setting up a currency settlement mechanism is an important step in deepening cross-strait relations and furthering economic integration. Political considerations should be put aside so that a comprehensive financial cooperation system can soon be put in place, to the mutual benefit of both sides. (THN)

(This commentary originally appeared in the Economic Daily News June 25, 2012.)

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