Taiwan's stock market has been going strong on speculation that the upcoming fourth round of semiofficial talks between Taiwan and China in December will lead to a quick conclusion of a bilateral economic framework agreement (or "ECFA") and a memorandum of understanding (MOU) on cross-strait financial supervision and management of financial institutions.

In an exclusive interview with CommonWealth Magazine, Sean C. Chen, chairman of industry watchdog the Financial Supervisory Commission (FSC) and chief negotiator on cross-strait financial issues, voiced confidence that the MOU on financial links will be able to protect the island's interests. "The FSC wants even more (from China), an even more comprehensive agreement, than the financial industry itself," he said.

At the current stage, Taiwan's financial industry players should calm down and figure out their own strategies to make sure that they are ready when business opportunities come around, Chen suggests.

Following are highlights from the interview:

Q: Since the middle of the year it has been rumored that the memorandum of understanding is about to be signed, yet four more months have passed without result. What is the reason for this delay? Will the memorandum be signed before year-end?

A: Actually, the memorandum has not been delayed. When Taiwan signs memorandums of understanding with other countries, the process seldom takes less than a year. Since the cross-strait memorandum of understanding is of course very important for Taiwan, we are devoting more time and personnel than for other memorandums. Progress should therefore be faster.

Taiwan and China first started to talk about a memorandum of understanding late last year during the second round of talks between Chiang Pin-kung (head of Taiwan's Straits Exchange Foundation) and Chen Yun-lin (head of China's Association for Relations Across the Taiwan Straits). But we only started to formally launch talks after the two sides signed a cross-strait financial cooperation agreement during the third round of the Chiang-Chen talks this April. I can't divulge the timetable for signing the memorandum, but I think if we look at the timeframe that it usually takes for signing MOUs with foreign countries, the cross-strait memorandum will be a very fast one.

There's an English proverb that says: "A watched pot never boils." Taiwan is already used to its policies being scrutinized every day, but that cannot be said for China. If everyone begins to scrutinize something and all sorts of comments are made, China will very likely want to put on the brakes for a while. Media attention and public discourse will of course help to make the negotiations more transparent and fair, but excessive speculation will only cause a counter effect.

Q: After the memorandum of understanding has been signed, what will be the strategy for negotiations on an ECFA and market access? Which benefits do you want to secure for Taiwan?

A: Presently, I am not able to reveal anything regarding the progress or content of the negotiations. But since May last year we have had a very clear consensus with the Mainland Affairs Council and the Ministry of Economic Affairs. Negotiations on the financial services industry have top priority.

More Demands to Be Made under ECFA

The reason is that Taiwan and China differ when it comes to the degree of market opening under World Trade Organization (WTO) market access requirements for the financial industry. Taiwan treats Chinese banks like all foreign-funded banks – we give them all the same treatment as domestic banks. But China has a lot of restrictions on the business operations of foreign-funded banks. In other words, in ECFA negotiations on the financial industry, we can ask China to give us better treatment than under WTO requirements, whereas China won't have any further demands to make.

Our goal is very clear. It's about the restrictions that concern Taiwanese financial institutions. Under an ECFA we hope to be able to go beyond China's current WTO regulations. We want to catch up to the foreign banks.

Our banks, for instance, hope to see a breakthrough regarding the restriction that bans them from engaging in renminbi business for three years after their representative offices have been upgraded to branches. The securities industry hopes to get permission to open wholly owned subsidiaries with full licenses. The insurance industry hopes for a breakthrough regarding the so-called 532 restriction (companies need to have assets of at least US$5 billion, have done business for at least 30 years, and have had a representative office in China for at least two years). All these topics are on our negotiation agenda.

Of course, we won't talk only about these three issues. Over the past year or so, we have explored all the possibilities and written up a long list. We hope to reduce legal obstacles to market access in China for (Taiwan's) financial services companies, regardless of their business development strategies. In talks with industry players so far I have discovered that the list compiled by the FSC is even longer than theirs and more comprehensive.

Q: There is a lot of speculation and expectation in the financial market regarding Chinese banks opening branches in Taiwan or gaining a stake in domestic banks. What stance does the FSC take on this matter?

A: As the competent authority our idea definitely is orderly entry. We don't want to see chaos. We already have reached a consensus with China on that.

I am not in a position to divulge details, but, from an objective perspective, Chinese banks will, first, not all rush to Taiwan at once, since the FSC has the authority to review and keep tabs on applications. Second, any country whose banking industry is just entering a foreign market is certain to start by opening branches. What's currently being discussed, namely, the founding of subsidiaries or mergers (of Chinese banks) with domestic banks, is still in the far-off future.

Chinese Banks in Taiwan – For What Aim?

Large Chinese banks are already eying the world stage, so businesswise they don't necessarily view the Taiwanese market as that important. But if you look at its significance in the non-commercial sense, it's another story. This is not limited to politics alone. For Chinese financial institutions, opening branches in Taiwan helps build their brand image at home.

When it comes to Chinese banks taking a stake in Taiwan's financial industry, I don't approve of taking a stake just for the sake of becoming a stakeholder. There must be meaning behind buying a stake in a company. For example, if two financial institutions have a cooperative business relationship, they can strengthen that relationship through cross-shareholding. In other words, financial companies should strengthen their own competitiveness instead of passively hoping for Chinese banks to take a stake in them.

Q: After the memorandum of understanding is signed and Chinese investment funds are allowed to enter Taiwan, how will this affect the local stock market and local investors?

A: The media have reported that China has set caps on overseas investment by qualified domestic institutional investors (QDIIs) of 3 percent (of total fund capitalization) in the stock markets of countries that have not yet signed MOUs with China, and 10-percent in those that have signed MOUs. These reports are incorrect. In fact, according to current Chinese official regulations, QDIIs can only invest in negotiable securities in the form of government bonds in the countries that have not signed memorandums of understanding with China – they are not allowed to invest in stocks.

After a memorandum of understanding has been signed, investment in Taiwan by (Chinese) QDIIs will reach a maximum scope of 10 percent (of total QDII capitalization). It's an "implicit regulation" that the Chinese government has not yet put down in writing: QDIIs must not invest more than 10 percent in any single market. This means that in the future the actual scope of QDII investment in Taiwan will very likely be less than 10 percent, although the possibility of investment exceeding 10 percent cannot be excluded. But we don't want to see the latter happen, so we will reach a consensus with China to keep the upper limit in principle at 10 percent at the present stage. Presently, 10 percent of total Chinese QDII capitalization is not even half of the average single-day trading volume on the Taiwan Stock Exchange. So the effect (from Chinese QDII investment) on the Taiwanese stock market will not be strong. The market shouldn't set its expectations too high.

Besides, Taiwan also has firewall regulations. A Chinese investor cannot acquire more than 10 percent of issued shares of a single company listed on the TAIEX through the stock market, and he cannot interfere with company management. Therefore, there is no need to worry that Chinese investors could influence the management of TAIEX-listed companies.

(Compiled by Hsiang-Yi Chang)

Translated from the Chinese by Susanne Ganz

Chinese Version: 簽MOU 政府比業者要的更多