Asiamoney.com: Taiwan’s ECFA anticlimax

Asiamoney.com, September 15 2010

September 12 was a big day for Taiwan: the formal start of the Economic Cooperation Framework Agreement, which brings in a host of tariff cuts in the spirit of warmer relations between Taiwan and Mainland China.

The government of Ma Ying-jeou has painted this as a landmark, and in many ways it is: it’s really the first concrete outcome of a thawing between the two states, who have otherwise been hostile to one another since 1949. It will help Taiwan’s economy for decades to come and it illustrates a considerable ratcheting down of tension in one of the world’s most enduring potential flashpoints.

But there is just no disguising a sense of disappointment, frustration and anticlimax in Taipei, particularly in the financial services arena. This was the area that was supposed to flourish the most in this brave new world: banks have for decades been unable to service their clients in their business on the mainland and have watched that lucrative work go elsewhere. Likewise private banking clients have deserted them because Taiwanese banks haven’t been able to offer investment services that include China; the mutual fund industry has suffered from being unable to hold Chinese securities; and the stock exchange has watched the country’s companies go overseas to raise capital in order to avoid onerous restrictions on the use of the proceeds.

There’s been two years of positive noises out of the Taiwanese banking system, but now even the most vocal of cheerleaders is sounding dejected. What’s really changed? There’s potential, for sure: six Taiwanese banks will probably be allowed to upgrade their representative offices to branches, although so far they’re only halfway there, with approval from the Taiwanese but not the Chinese side. And it’s true that, once in place, they will be allowed to offer renminbi business a lot quicker than most foreign banks. But as of today, nothing’s happened.

At least the banks can look forward to new opportunity sooner or later. The securities industry, on the other hand, has looked on in disbelief as their entire sector has been comprehensively ignored. Not only has nothing changed for them by the time of ECFA’s introduction, there’s nothing to suggest it’s going to any time soon either. They still can’t set up licensed branches in China or have full ownership of a venture there. They just have to hope they get remembered in the next round.

There’s nothing in this to suggest that the capital flows expected to flow from ECFA are going to do so. Mutual funds can now invest up to 10% of their capital in China-related investments (which chiefly means H-shares); that’s still not giving their portfolio managers free rein to build what they think is an optimum regional portfolio. Besides, pension funds don’t seem to be covered by the same rules.

What about Taiwan Depositary Receipts, which were supposed to create an avenue for Taiwanese companies that had fled overseas to come home, and for red chips and H-share companies to tap a market full of buoyant investor interest at a mighty premium? There’s been progress, sure, and last week’s deal for Yangzijiang Shipbuilding was the first mainly Chinese company to use the vehicle. But that’s legally a Singaporean company – we still haven’t seen a real red chip give it a try.

Any fair appraisal has to respect that this is a slow process and important to get right. But the problem is, when you look ahead, you see obstacles, not a clear path. Mayoral elections in November are expected to illustrate flagging support for Ma and the KMT party; that, in turn, is likely to impede urgency on closer relations with China, for fear that the DPP party – which continues to demand formal independence – could make greater gains. The government is fond of pointing out that ECFA was passed by the legislature without a single dissenting vote, but rather less keen to mention that this was because the opposition boycotted the entire vote.

The world investment community has spotted this too. In May 2009 Taiwan was trading at a 53% premium to the region. Today, it’s 10%, and heading south. The buzz, the euphoria of enhanced cross-straits relations – it’s gone. Coupled with a weakening outlook for tech stocks, UBS and Credit Suisse have recently cut their forecast for the Taiwan stock market, and foreign capital has been leaving the market.

Can the potential be realised? Sure, and with time, there’s no reason to imagine it won’t be. The next edition of Asiamoney will look in detail at these issues with comment from leading Taiwanese bankers. But in the securities industry in particular, Taiwanese had expected swifter progress than this.