Friday, August 31, 2012

Yuan Clearing MOU signed....

Dollar elbowed aside, reports the CNA:
The MOU, signed between the central banks of Taiwan and China, will pay the way to allow direct exchanges between the Taiwan dollar and the Chinese yuan, so that businessmen will no longer have to use the U.S. dollar as a medium for currency exchanges between the two sides, said Yeh Hui-te, deputy chairman of the All-China Federation of Taiwan Compatriots.

The banks "can help us save time and losses incurred from currency exchanges, so this is definitely a good thing," said Yeh.

However, some of the businessmen voiced concerns such as whether a daily currency exchange limit will be in place. In Hong Kong, the daily currency exchange ceiling is 20,000 Chinese yuan (US$3,139.80).

Taiwan's central bank governor, Perng Fai-nan, told reporters earlier in the day that the MOU is just a starting point for cross-strait currency settlement and that further negotiations will be required to iron out the details of the mechanism.

As for when Taiwan will begin to introduce yuan-denominated financial products, Perng said this will depend on how large the yuan market in Taiwan becomes and also on the types of products released by the banking industry.
One fork of China's Yuan strategy is clearly to reduce the role of the dollar. In simple terms, Bloomberg notes:
After the deal becomes effective in about two months, Taiwanese banks will be able to take yuan deposits and convert yuan into the New Taiwan dollar. The conversion will allow Taiwanese investors on the mainland to cut foreign exchange costs by skipping the current process of first converting their yuan earnings into U.S. dollars.
Another Bloomberg piece says....
China has been expanding its currency relations with trade partners to promote greater use of the yuan in global trade and investment. Nations including Singapore, Japan, and Thailand have signed similar deals with the world’s second-biggest economy as part of their efforts to reduce reliance on the dollar. Exports account for more than two-thirds of Taiwan’s economy and some 30 percent of shipments are bound for China.

“It’s a good development as there’s huge demand for yuan in Taiwan,” said Penny Chen, who helps oversee $160 million in yuan assets as a fund manager at Manulife Asset Management Co. in Taipei. “Taiwan’s exporters and small-to-medium enterprises will be able to reduce transaction costs.”
Taiwan meanwhile wants into the lucrative Yuan clearing business, a business also being pursued by London and other financial centers, and currently a big business in Hong Kong, business Taiwan wants to poach. Bloomberg also identified another factor in the deal:
Taiwan also hopes to attract wealthy Chinese to park their yuan funds on the island, said Norman Yin, professor of finance at Taiwan's National Chengchi University, noting that China has seen an increasing amount of capital outflow despite its foreign exchange control.

"Compared with Hong Kong, Taiwan has more advantage in the wealth management business because its transactions do not come under China's watchful eyes," Yin said.
Yes! We can take those corrupt Yuan gains and hold them as deposits outside China's control here in Taiwan. Wheee! And of course, a key beneficiary will be cross-strait organized crime, one of the major beneficiaries of cross-strait rapproachment, which will be able to repatriate its gains as Yuan holdings to Taiwan banks, as "foreign" cash holdings whose interest will be capital gains and thus, tax-free. Am I ever in the wrong business....

As the several articles note, this is only an MOU and the details need to be worked out. So all this celebration may come to nothing once everyone sits down with their own agenda....
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Anonymous said...

Not sure why this is a bad thing for Taiwan. More liquidity for Taiwan banks never really hurts, and could wind up boosting the moribund property market.

Michael Turton said...

It might not be a bad thing for Taiwan. I wonder if it will piss off the Americans, though.