"You'll get 6.66% interest in the third month!"

"Deposits above NT$100,000 get an interest rate 1 percentage point higher!"

On billboards and bank facades all over Taiwan, advertisements for lucrative savings deposits in renminbi have been ubiquitous, ever since Feb. 6, when the Taiwanese banking sector formally kicked off trade in the Chinese currency.

On the day of the launch, Ho Show-chung, chairman of SinoPac Financial Holdings Co., was stunned to see the long, winding queue of people pushing into one bank outlet.

"I have been a banker for 30 years, but I have never seen people stand in line to deposit money," Ho told his employees with a sigh.

"A lot of our customers opened their safety deposit boxes which were packed with renminbi bills. Now they have taken all that money out and deposited it into the bank," observes an employee at Taipei Fubon Bank. Over the past three months similar stories have played out at banks across the island.

"Now Chairman Mao is running through the streets," says Joseph Tsai, chairman of Mega Financial Holding Co. (The portrait of Mao Zedong is prominently displayed on all Chinese banknotes issued since 1999.)

Tsai called a special meeting to put a damper on banks' excessive renminbi enthusiasm, admonishing his staff, "Don't overdo it," and warning them against using high interest rates to attract even more renminbi business.

World's No. 3 Offshore RMB Hub

But the Taiwanese are still crazy about the renminbi.

Within the first ten working days after the Feb. 6 launch of renminbi deposits, the local banking system had absorbed 10 billion renminbi.

The latest statistics from the Central Bank of the Republic of China (Taiwan) show that in mid-April renminbi deposits at domestic banks already topped 20 billion renminbi. Including the nearly 30 billion renminbi that had already been deposited at offshore banking units (OBUs) of Taiwanese banks, total renminbi-denominated deposits now exceed the 50 billion renminbi mark.

Taiwan now has the third highest quantity of renminbi deposits outside China, behind Hong Kong with 650 billion renminbi and Singapore with 90 billion. Virtually overnight Taiwan has established itself as the world's No. 3 "offshore renminbi trading center."

As for Taiwan's future potential, the forecasts of economist Schive Chi, minister without portfolio and the former chairman of the Taiwan Stock Exchange, are the most conservative. Schive Chi believes that renminbi deposits including those held at Taiwanese OBUs will reach 60 billion renminbi by year's end. The most optimistic forecast comes from John Li, CEO of HSBC Taiwan, who predicts an increase to 200 billion renminbi. "100 billion renminbi shouldn't be a problem," posits Cheng Cheng-mount, president of the Taiwan Academy of Banking and Finance.

If Taiwan indeed accumulates deposits of 100 billion renminbi by year's end, then the island's banks will have by far outperformed their Hong Kong peers, who needed six years to get to the 100 billion renminbi mark. The Hong Kong experience shows that renminbi deposit growth begins to slow down once such deposits account for about 10 percent of total bank deposits. Therefore, Grace M.L. Jeng, executive vice president of First Commercial Bank, expects renminbi deposits in Taiwan to eventually exceed 550 billion renminbi.

"Older customers won't buy Euros or Australian dollars, but they are highly accepting of the renminbi. Many are ready to switch part of their Taiwan dollar deposits into renminbi deposits," says Jeng. As of the end of March, First Commercial Bank already had 35,000 renminbi account holders, with combined deposits worth more than 1.7 billion renminbi, a market share of more than 10 percent.

Taipei's Financial Market Awakens

"This year will be a red-hot year," predicts HSBC's Li. "Once renminbi operations opened, it meant that a positive environment for money flow had been created."

The most dramatic change concerns the atmosphere in Taipei's financial district. All of a sudden a number of foreign banks are displaying a keen interest in Taipei, which had been sidelined by the international financial community for many years.

The British Trade and Cultural Office in Taiwan has begun to sponsor travel packages for financial experts, encouraging them to go on fact-finding trips to London to study the city's initiative to develop as a center for offshore renminbi business.

British financial services company Barclays Bank sponsors relevant symposiums at the Taiwan Academy of Banking and Finance in Taipei. The bank even sent a senior executive in charge of global renminbi business from London to Taiwan. Cosmas Lu, managing director of Barclays Bank Taiwan, points out that London is already trading dim sum bonds (renminbi-denominated bonds issued in Hong Kong) and hopes to attract Taiwanese investors. In the future London bond traders hope that European investors will buy Formosa bonds (bonds denominated in currencies other than the New Taiwan dollar and issued in Taiwan by foreign institutions).

"Everyone's suddenly much more interested in Taiwan," observes HSBC's Li excitedly. "Originally the international financial community's interest in Taiwan was perhaps just belly-button high. Now it has risen to nose or even forehead level, which will help Taiwan solicit corporate capital resources," Li asserts.

The renminbi has also revived Taiwanese bankers' long buried dreams.

Jerry Harn, president of Taipei Fubon Bank, notes that Taiwan has always wanted to become a financial center, but never achieved that goal. In the past whoever wanted to become an international banker had to work for a foreign bank. But now, with the current rise of the renminbi, the state of international finance has reached a decisive moment. When the U.S. dollar no longer dominates the market, Taiwan stands a chance of becoming one of the handful of renminbi centers in the world, Harn believes.

Victor Kong, president of Fubon Financial Holding Co. Ltd., sees things in the same light. "Right now Taiwan is on the cutting edge," he says.

The Largest Offshore Pool of Renminbi

Taiwan owes this position to its trade prowess.

Of the four territories presently aggressively developing offshore renminbi business, only Taiwan enjoys a trade surplus with China.

Based on Chinese customs statistics, Taiwan registered a US$95.4 billion trade surplus with China in 2012, which suggests that the island earns around 600 billion renminbi per year. If just 10 to 20 percent of cross-strait trade is settled in renminbi, Taiwan's renminbi deposits will automatically increase by 60 billion to 120 billion renminbi. This would make Taiwan the place with the largest reserve of offshore renminbi liquidity.

Taiwan also functions as a major trial balloon for the Chinese leadership in its efforts to promote the renminbi as a trade settlement currency.

Many bankers point out that the sharp increase in renminbi-dominated deposits in Hong Kong was due to a politically motivated influx of money from China. In 2010, Beijing allowed several financial institutions to issue dim sum bonds in Hong Kong, which led to an outflow of renminbi to the territory and an ensuing increase in renminbi deposits there to above 100 billion renminbi.

But Taiwan demonstrates an astounding potential to automatically accumulate renminbi through trade. "It's not that China is making concessions to Taiwan, it's that Taiwan is presenting another possibility. Only if they are successful in Taiwan will they be able to boost the international influence of the renminbi," explains Kong.

Statistics by the Central Bank of the Republic of China (Taiwan) show that in March 9.25 billion renminbi worth of cross-strait trade was settled in renminbi, about 10 percent of overall trade between Taiwan and China.

On Feb. 6, Taiwanese apparel maker Makalot Industrial Co. Ltd. was the first customer to open accounts for renminbi business at both Standard Chartered Bank and HSBC.

Mainly to bring down costs, Makalot is calculating transactions with China as much as possible in renminbi, explains Makalot CFO Chin Kung Huang. If prices are quoted in U.S. dollars, mainland suppliers will factor in the expected appreciation of the renminbi against the greenback, which leads to inflated quotations. Quotations in renminbi are 3 to 5 percent lower than those in U.S. dollars.

And then there is time and money saved on cumbersome export procedures. "When you use renminbi to quote prices and ship products, you can save a lot of time and minimize verification procedures when applying for export rebates," Huang points out.

But just as is the case with all red-hot investments, there is risk involved. That's a fact that Taiwanese individual and institutional investors need to face.

Risk No. 1: China's Got the Ball in Its Hands

All of a sudden "Chairman Mao," has become the talk of the town in Taiwanese financial circles. But as virtually every banker points out, as long as the renminbi is not a freely convertible global currency, China calls the shots.

Putting purely economic factors aside, the boom or doom of Taiwan's renminbi business also hinges on China's policy toward the island. But the linking of financial services, which are crucial for an economy, to the "uncertain goodwill" of China is unprecedented in the history of Taiwan's financial industry.

China hopes to nurture Taiwan's renminbi market to size, and its "helping hand" is very obvious. A bank manager, who did not want to be named, points out that the Taipei branch of state-owned Bank of China advertises annual interest rates of up to 3.08 percent, nearly 30 percent higher than interest rates in Hong Kong. "They clearly want to give the renminbi (in Taiwan) a boost," the manager observes.

Consequently, interest on renminbi deposits in Taiwan hovers around 2 percent, considerably higher than the 0.81 percent in Hong Kong. Given that the annual interest rate for Taiwan-dollar deposits stands at less than 1.5 percent and that the renminbi is widely expected to appreciate, virtually every domestic bank allows its customers to switch a fixed amount of savings in the local currency to a renminbi deposit at regular intervals.

Furthermore, since China's domestic interest rate on loans is twice as high as in other countries, everyone is eager to repatriate offshore renminbi for investment in China. The Chinese government makes sure it calls the shots by controlling the inflow of offshore renminbi. Relevant quotas are allocated to qualified foreign institutional investors (QFII) and RMB qualified foreign institutional investors (RQFII). Who gets the higher quota emerges as the winner.

In Hong Kong, for instance, RQFIIs have been allocated a quota of 270 billion renminbi. But the first batch of financial institutions that secured an RQFII quota was almost invariably Chinese-funded securities and investment trust companies. Hong Kong-funded financial institutions and other foreign banks were granted favors only in the second round.

When Guo Shuqing, chairman of the China Securities Regulatory Commission, visited Taiwan in January this year, he declared that Taiwan would be granted an RQFII quota of 100 billion renminbi. That's less than half of Hong Kong's quota. And so far, Guo has yet to deliver on his pledge. The allocation of these 100 billion renminbi will also decide which Taiwanese financial holding will come out at the top in terms of renminbi business.

Whether China will increase Taiwan's RQFII quota in the future or not will also pertain to the island's competitive edge versus rival Hong Kong.

Risk No. 2: Overdependence

Lee-rong Wang, research fellow at the Chung-Hua Institution for Economic Research (CIER), who has done extensive research on renminbi financial centers, believes that Taiwan's financial services are not diversified enough because the island is not a financial hub. The more residents hold assets in renminbi, the more domestic banks will depend on such business. Taiwan might even become more dependent on renminbi business than other financial centers.

"National security is still very important. Taiwan can by no means become like Hong Kong," argues Wang. Still, the probability that China will change its currency policy toward Taiwan overnight is rather low, Wang believes, because as a member of the World Trade Organization (WTO), Taiwan could ask the global trade watchdog for mediation.

Overall, the politicians and experts interviewed for this article came to the same conclusion: Although there are risks involved, Taiwan cannot stop moving forward.

Lu of Barclays points out that due to its high savings rate Taiwan has amassed large amounts of idle capital, but at the same time its human capital continues to flee to greener pastures. "The best strategy for Taiwan is to expand this market so that money and people stay on the island," suggests Lu.

"The business we don't do will be taken away by Hong Kong," predicts former vice president Vincent Siew. Up until now, Taiwan has only developed its financial sector to meet the needs of Taiwanese industry.

The example of Hong Kong shows that following closer economic integration with China, the Taiwanese won't have to worry too much about ideological or national identity issues, but rather about the substantial economic impact.

Risk No. 3: RMB to Squeeze Out Taiwan Dollar?

Lin Thung-hong, assistant research fellow at the Institute of Sociology of Academia Sinica, thinks that Hong Kong has recently experienced negative effects from its growing integration with China.

In Sheung Shui, a town on the Hong Kong side of the Chinese border, it has happened that cross-border traders from China rejected Hong Kong dollars and only accepted payments in renminbi. Since Hong Kong residents felt they were being discriminated against, their own identification with the territory only became stronger, observes Lin, who obtained his doctoral degree from the Hong Kong University of Science and Technology.

"The Hong Kong experience shows that earning renminbi has nothing to do with a person's national identity," notes Lin.

The ubiquitous presence of "Chairman Mao" in the territory exerts its greatest pressure on the local currency, the Hong Kong dollar.

In June 2012 "Mr. Hong Kong dollar" Joseph Yam, the former head of the Hong Kong Monetary Authority, urged that the territory review the Hong Kong dollar peg to the U.S. dollar to take into account Hong Kong's actual economic and trade situation.

"I have come around to realizing the extent of the impact of the appreciating exchange rate of the renminbi against the Hong Kong dollar on the psychology of the people," Yam said in an academic paper titled The Future of the Monetary System of Hong Kong. The relationship between the Hong Kong dollar and the renminbi oscillates between competition and substitution.

"Which is bigger, the U.S. dollar or the renminbi? Hong Kong now faces this conundrum," notes Cheng of the Taiwan Academy of Banking and Finance. He believes that in the past two or three years the exchange rates for the renminbi and the Taiwan dollar have shown a degree of synchronization, which shows that in its exchange rate and interest rate policy Taiwan's Central Bank already takes the renminbi's foreign exchange movements into account. The more renminbi-denominated assets Taiwanese residents hold, the fiercer the competition between the Taiwan dollar and the renminbi will become.

Will this be a challenge or an opportunity for Taiwan? The paths of Chairman Mao and Republic of China founder Sun Yat-sen, whose portrait is on Taiwan's NT$100 bills, are sure to cross frequently as the two currencies change hands. Time will tell who will emerge as the winner.

Translated from the Chinese by Susanne Ganz