The thawing of relations across the Taiwan Straits has opened the huge Chinese market to Taiwanese financial institutions, which are rushing to set up operations across the straits in the belief that this is critical to breaking out of the limited Taiwan market and securing sustained development.

New measures approved by the Executive Yuan on Jan. 26 allows Taiwanese banks to buy into their Chinese counterparts and to set up branches and subsidiaries in China, a development made possible under a Memorandum of Understanding on cross-straits financial supervision that took effect earlier in January. .

Fubon Financial Holding appears to be at the head of the pack in the race to China. Fubon has established a solid presence in Fujian Province (just across the straits from Taiwan) through the Xiamen Commercial Bank, which has 32 branches in Xiamen City. Fubon owns just 20% of Xiamen Bank (through an investment by Fubon Bank (Hong Kong), but has a strong influence on its management—including the power to appoint its president.

Victor Kung, president of Fubon Financial Holding, says that Xiamen Bank will expand to 200 branches within five years (with funding from Fubon), making it the largest financial institution in eastern China.

Fubon Bank (Hong Kong) has also received permission from the Chinese government to set up a representative office in Dongguan, and Taipei Fubon Bank has applied to Taiwan’s Financial Supervisory Commission to establish a representative office in Shanghai. In addition, Fubon is scheduled to launch a non-life insurance business in China in the first quarter of this year.

Early this month, the board of directors of Fubon Investment Trust approved a paid-in capital increase to NT$2.1 billion (US$65.6 million at NT$32:US$1), up from the current NT$500 million (US$15.6 million), in order to set up a fund management firm in China.

On March 1 Fubon Venture Capital (another Fubon Holding unit) and CTTIC Asset Management announced the establishment of a joint-venture leasing company in China. This is the first cross-straits financial partnership following the signing of the MOU on financial supervision

The new company will have 500 million yuan (renminbi, or RMB, equal to NT$2.35 billion). CTTIC Asset Management, a subsidiary of CITIC Holdings, will own 51% of the venture and Fubon Venture Capital 25%. Other shareholders will include the Beijing Tongzhou Area General Investment Co.

The joint venture will focus on the handling and maintenance of scrap value, consulting and guarantees for leasing transactions, and other businesses approved by the regulator in China.

Established Network

Another Taiwanese firm that has won a head start in the rush to China is Cathay Financial Holding. Its affiliated Cathay Life Insurance has established an extensive business network there, with a headquarters and six branches, under a joint venture with China Eastern Airlines. This arrangement will ease Cathay United Bank’s entry into the Chinese market; as a first step, Cathay United plans to upgrade its Shanghai representative office into a full branch.

Chinatrust Financial Holding is also expanding in China, with plans to upgrade its Beijing office into a branch and establish a subsidiary in Shanghai. Chinatrust envisions a network consisting of one subsidiary, six branches, and 42 offices in China within 10 years. To help achieve that goal, the company’s shareholders approved a capital increase to NT$150 billion (US$4.3 billion), compared with the original NT$100 billion (US$3 billion). The China venture is currently being overseen by a 10-member task force.

Almost all of the other financial institutions in Taiwan, including those owned by the government, have also mapped out plans to tap the Chinese market.

For First Commercial Bank, the priority tasks are to upgrade its Shanghai office into a branch and boost services for Taiwanese-invested businesses in the Pearl River Delta via branches in Hong Kong and Macao.

Taiwanese banks believe that the Chinese market is vital to their continued development, especially following the mass exodus of their business clients to the other side of the Taiwan Straits. With demand for funding at home weakening as a result, the interest spread in Taiwan has shrunk to just 1.1 percentage points, only half the spread in China. Taiwanese banks operating in China can tap the customer base provided by the Taiwanese-invested companies there.

Many Taiwanese banks hope to kick-start their Chinese operations by buying into Chinese banks, but market insiders believe that they will have to be satisfied with second- or even third-tier municipal banks, since first-tier banks often boast much higher ratios of market price to book value than due Taiwanese banks with their thin profit margins. And, the observers urge, the Taiwanese banks must move quickly, because the window of opportunity for establishing partnerships with Chinese banks will likely disappear in three years.
(by Philip Liu)