Finally crossing the bridge

After amendment of the Regulation, Taiwan banks are now allowed to set up branches or subsidiaries in China and to make direct equity investments in Chinese banks. Key amendments to the Regulation with respect to investment in China by Taiwan banks include the following:

1. Setting up a branch or making equity investments

Taiwan banks or their offshore banking subsidiaries may apply for approval to set up branches or subsidiaries in China, and Taiwan banks or financial holding companies or their offshore banking subsidiaries may apply for approval to make equity investments in Chinese banks, subject to the following restrictions:

a. a bank may only choose two out of the following three methods of investment provided in the Regulation: (1) setting up branches in China, (2) setting up subsidiaries in China, and (3) making an equity investment in a Chinese bank;

b. a financial holding company may apply to make an equity investment in Chinese banks only if its banking subsidiary does not have investment or business operations in China other than through branches or subsidiaries in China;

c. a bank or a financial holding company may invest either directly or through an offshore subsidiary, but a bank and its offshore subsidiary may not both apply for approval to make investment or to operate businesses in China; and

d. if a bank or a financial holding company chooses to make an equity investment in a Chinese bank, it may only invest in one such bank.

2. Qualifications for Taiwan banks

To apply for making investments in China, the Taiwan bank must show records of regulatory compliance for the past three years and its financial ratios need to meet the thresholds set forth in the Regulation to demonstrate the bank has a certain level of ability to take on risk and good asset quality. In addition, the Regulation requires that the applicant must have experience and knowledge in international banking and financial services and shall have established a branch in any OECD member country for at least five years. If a financial holding company applies for making investments in accordance with the Regulation, its capital adequacy ratio must be 110% or above and its double leverage ratio shall not exceed 115%. Media reports indicate that 70% of Taiwan banks may qualify for making such investments, and 13 out of 15 Taiwan financial holding companies may also qualify.

3. Other restrictions

a. To avoid the risks in regard to over-concentration in the Chinese market, the Regulation provides that (1) the total amount of a Taiwan bank's operating capital and investments in China shall not exceed 15% of its net asset value and (2) the total amount of a financial holding company's investments in China shall not exceed 10% of its net asset value at the time of the application.

b. The total gross amount of loans by a Taiwan bank's PRC branches shall not exceed twice that of the aggregate amount of such branches' total gross deposits and the sums received from interbank lending in China.

On the other hand, the Regulation also provides that qualified Chinese banks may apply for approval to set up representative offices, branches or make equity investments in Taiwan's banks, provided that a Chinese bank may only choose one method of investment. The permissible methods are setting up branches or making equity investments. In order to invest in Taiwan's banks, a Chinese bank must also either be among the top 200 banks in the world in terms of asset value or have established a branch in any OECD member country for at least five years. The only deposits that may be received by Chinese banks operating in Taiwan are deposits of NT$1.5 million or more in the form of fixed term certificates of deposit. Currently, five Chinese banks have representative offices in Taiwan.

Market Reactions to Amendments

Taiwan banks have long decried regulatory restrictions prohibiting them from investing in the Chinese market. The banking industry has seen investment in Chinese banks by other banks around the world for the past ten years, while Taiwan banks have either not been able to make such investments or have faced significant regulatory hurdles. Following the effectiveness of the amended Regulations and the FSC's permission to begin submitting applications under the amended Regulations in April 2010, numerous Taiwan banks immediately applied for approval. As of June 2010, seven Taiwan banks have submitted such applications , each of which already have representative offices in China, and of these applicants, four Taiwan banks have already received approval from the FSC to open branches in China.

One of the main goals of Taiwan banks is to provide banking services to Taiwanese businesses operating in China. The Regulations as amended will help Taiwan banks to expand in this market. Chinese banks will also be attempting to increase their loans to China-based Taiwanese businesses. On June 2010, the Industrial & Commercial Bank of China, which is the world's biggest bank by market value, said it planned to more than double its loans to China-based Taiwanese businesses in the next two to three years. It is planning to make US$7 billion in loans to China-based Taiwanese companies. It is likely that other Chinese banks have similar marketing objectives. Therefore, the Regulations as amended came none too soon in permitting Taiwan banks to expand in a market where they potentially have an advantage. Gong Tian-Xing, the general manager of Fubon Financial in Taipei, has said that one of the best opportunities for Taiwan banks would be to have Taiwanese businesses operating in China.

Future Changes in Law and Policy

Even though the Regulation has already provided significant opportunities for Taiwan banks to enter into the Chinese market, Taiwan banks are expecting further relaxation in cross-strait financial restrictions and more favorable terms after the recently signed Economic Cooperation Framework Agreement (ECFA) between Taiwan and China.

One of the main issues covered in the ECFA is the qualification of a Taiwan bank to offer a full range of renminbi (Rmb) services in China. According to Chinese regulations governing foreign banks in China, a foreign bank may, after two years of operation, have its representative office upgraded to a branch, and after another three years of operation that include positive earnings for two successive years, the branch may start to launch full Rmb services. Currently, eight Taiwan banks have representative offices in China, and seven of them are likely to be eligible for an upgrade to branch status. If China is willing to loosen these restrictions for Taiwan banks, this will allow Taiwan banks to bypass the waiting period for launching Rmb businesses and will undoubtedly help Taiwan banks compete with other foreign banks already operating in China.

Furthermore, the Regulations still impose restrictions on the methods of investments available for Taiwan banks. For example, as described above, Taiwan banks may only invest in Chinese banks directly or through an offshore subsidiary. However, it is not allowed to invest in Chinese banks through both methods. This creates restrictions for Fubon Financial, a frontrunner of the Taiwan banks that have invested in China. Fubon Financial has already invested in Xiamen Bank through its offshore Hong Kong banking subsidiary. Fubon Financial argues that its Hong Kong banking subsidiary is permitted to invest in a Chinese bank pursuant to other laws, namely, the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA). However, the Regulations as amended will not permit Fubon Financial to invest directly in Chinese banks after it has already invested indirectly through its Hong Kong banking subsidiary. Fubon Financial has stated that it will wait for the signing of ECFA before making further changes to its holding structure.

Both Taiwan banks and Chinese banks will likely continue to seek greater freedom and authority to expand their businesses across the Taiwan Strait.

Victor Chang, Mark J. Harty, Peggy Chang and Christy Lin, LCS & Partners, Taipei