Recent fluctuations in mainland China’s yuan have done little to alter its progress toward becoming an international currency. To create a milestone in its financial services development and establish itself as an offshore yuan trading center, Taiwan must be more pragmatic about understanding market conditions.
Yuan deposits at Taiwan banks have grown rapidly, creating an impressive fund pool. However, compared with other more mature financial centers, whether from the perspective of the legal framework or the variety of financial products on offer, the nation still has a long way to go. The crucial next step is to create a distinctive offshore yuan market and cooperate with other markets.
There are various reasons why the yuan has managed to gain importance in the international marketplace. The first is internationalization. Following calculated official steps to make it a more convertible currency, a nascent trend has developed at borders of neighboring countries where the yuan is used to settle trade deals. In Hong Kong, the yuan has also long circulated alongside the Hong Kong dollar, boosting the currency’s exposure in financial centers. International financial institutions that monitor the currency closely have started thinking about how to better employ these deposits. These developments have added momentum to turning the yuan into a commodity.
Another factor is that the yuan is a strong currency and has been one of the more stable ones since the U.S. Federal Reserve began cutting its quantitative easing program. Coupled with the ongoing credit crunch in mainland China, the prospect for the yuan is that already high interest rates will rise. This combination of factors makes the yuan increasingly attractive as an international investment target.
Proliferation of yuan-denominated financial instruments has followed the currency’s expanded circulation. In light of this trend, regional financial centers are striving to grab a piece of this emerging currency market, and are encouraging domestic institutions to expand this business and win the custom of interested domestic investors. Hong Kong, London and Singapore, in addition to Taiwan, are fighting for a share of the offshore yuan market.
These other three centers that are ambitious to become offshore yuan centers have established themselves as international or regional financial centers. They are far ahead of Taiwan in terms of financial liberalization and the variety of products on offer. What Taiwan does have is its accumulated surplus from decades of cross-strait trade. This is way since the opening of yuan-denominated services, deposits at Taiwan banks have rapidly increased and are second only to Hong Kong’s. Deposits at domestic and offshore banking units totaled more than 210 billion yuan as of the end of January, and optimistic projections are that they may exceed 400 billion by the end of this year.
Strictly speaking, compared with these three markets, Taiwan has, at best, only a rapidly growing deposits pool. As these markets go full steam ahead to create all manner of yuan-denominated products, Taiwan lacks the range of products to satisfy investors and the channels to dispose of these funds.
But this may also be where Taiwan’s opportunity lies, because it can learn from these markets. Hong Kong, London and Singapore are competing with each other and do not have the friendly relations that Taiwan has with each of them, which gives Taiwan the strong possibility of cooperation on yuan-denominated services.
City of London Lord Mayor Fiona Woolf recently visited Taiwan and many foreign commercial banks continue to express their desire to work with domestic banks and introduce their financial products to Taiwan. These developments indicate that the yuan can act as the catalyst for Taiwan to explore all kinds of cooperative opportunities with international financial institutions. Domestic banks can shop around to bring in the best instruments or design their own killer products.
One should see clearly that the reason offshore finance can develop is, to a certain degree, due to the lack of openness in the financial markets of the currency-issuing country. Also because offshore markets handle currencies issued elsewhere, they tend to each develop its own characteristics and limitations. This is particularly true for Taiwan’s relatively underdeveloped financial market. Taiwan should seek to bring in the best, rather than many, yuan-denominated products. The point is to choose the right products.
It is not at all hard to find especially attractive yuan products. For corporate finance, the products can be designed to meet the needs of small and medium enterprises. For consumer finance, the target should be fixed-rate instruments devised for retirees in an aging society.
Taiwan once had the ambition to become an Asia-Pacific regional financial center, but was unable to achieve this for various reasons. Today the opportunity has come for the nation to become an offshore yuan center. Taiwan possesses the conditions required for success, and this is also the perfect opportunity to stimulate growth of domestic financial markets. Financial institutions should make the most of this opportunity, and the government, aside from setting targets, should be more proactive. (SDH)
(This commentary first appeared in the Economic Daily News March 8, 2014.)