Taiwanese life insurers and asset managers are fine-tuning preparations to handle offshore RMB business, with currency clearing set to become effective on the island at the end of this month.
The People’s Bank of China announced that an RMB clearing bank would be established in Taiwan, after central banks on the two sides signed a memorandum of understanding in August.
The expectations are that this will be Bank of China (Taiwan), which would then become the entity through which Taiwan-based banks transact and convert domestic dollars into offshore renminbi, or CNH.
The long-awaited announcement from PBoC is significant in that it will formally consolidate Taiwan’s position ahead of Singapore and London as the second key offshore RMB centre.
Hong Kong’s preeminent position for financing, investment and hedging in CNH was augmented when Bank of China (Hong Kong) became the city’s RMB clearing bank in 2003.
Once a clearing channel is established in Taiwan, industry players expect the island to follow in Hong Kong’s footsteps, building an offshore RMB pool via trade settlement and individual accounts.
The total value of merchandising trade between Taiwan and China exceeded $100 billion last year. This is on the rise and expected to spur cross-strait settlement in RMB, with estimates the market could reach up to $12 billion a year.
The value of RMB payments in Taiwan grew fourfold between January and August this year; RMB payments now represent 24% of total payment value between Taiwan and China and between Taiwan and Hong Kong, from 9% this January, according to data from Swift.
Augusto King, RBS’s head of debt capital markets for Asia based in Hong Kong, points out that Taiwanese insurers were the main buyers of China Development Bank’s maiden 15-year offshore RMB bond issue in January.
“Taiwanese insurers have started writing insurance policies that have pay-outs denominated in renminbi, so they need to buy renminbi-denominated assets to generate renminbi cash flows to hedge their long-term liability,” notes King.
Since August last year Taiwanese insurers have been permitted by regulators to allocate up to 10% of their overseas investment into dim-sum bonds.
While they are lobbying authorities to allow them to offer life insurance policies denominated in RMB, local media point out how groups such as Cathay Life and Taiwan Life are offering such services indirectly by on-selling RMB-denominated policies issued by Chinese joint ventures.
“You could only expect there to be more interest from insurers to underwrite RMB-denominated insurance policies once they have a clearing mechanism to settle renminbi,” reflects King. “This, in turn, will lead to more demand from Taiwanese insurers to invest into offshore RMB long-dated assets, primarily through dim-sum bonds.”
Candy Ho, HSBC’s head of RMB business development for Asia-Pacific, expects Taiwan’s offshore RMB pool to build up significantly given the island’s close trading ties with the mainland.
But whether this will be circulated freely, and even remitted to other offshore RMB centres, will depend on the scope of RMB products and services allowed under the clearing arrangement, as well as by the deregulation of domestic banking units in Taiwan, she notes.
“If offshore renminbi liquidity in Taiwan is fungible – that it can be remitted and used in other offshore centres – the combined offshore CNH liquidity pool globally will increase,” Ho says.
Taiwan’s central bank made a policy headstart in July last year by allowing Taiwanese banks to establish offshore banking units (OBUs) to tap into RMB business opportunities.
These would enable Taiwanese manufacturers based in mainland China to obtain RMB loans and open RMB accounts in an offshore RMB centre, primarily Hong Kong.
As of August this year, Taiwanese banks’ OBUs had accumulated Rmb17.5 billion in deposits, according to the island’s central bank, and industry players expect this pool to continue growing.
In Taiwan, the operation of foreign currency-related banking business is regulated differently for domestic and offshore banking units, with heavy restrictions in place for the former.
Industry players also note that fund managers are preparing for opportunities to tap investor appetite for RMB-linked assets by structuring products tied to onshore Chinese securities.
They point out that smaller fund houses are applying for QFII quotas now that Beijing has lowered the requirements to attract foreign investment.
Top-tier Taiwanese securities firms and asset managers including Capital Investment Trust and Polaris Securities (now Yuanta Polaris Securities) have already obtained QFII quotas to invest in the onshore securities market.