Source: The Financial Times  01/01/2008HSBC™s agreement to take over The Chinese Bank last month will see it focus on rebuilding the insolvent Taiwan lender to help it expand in the local market. But a major motive behind the acquisition lies further afield, in the largely untapped potential of Taiwanese customers in China. With more than $150bn in investments on the mainland, Taiwanese companies are one of Chinas largest sources of foreign direct investment. An estimated 2m Taiwanese live in China. However, Taiwan’s government bans domestic banks from investing in China and lending in renminbi, which means that foreign lenders with a significant branch network and customer base on the island are set to enjoy a unique competitive advantage.

Taiwan is a key component of HSBC’s Greater China positioning,” says Vincent Cheng, chairman of HSBC’s Asian unit.

Together with our market-leading franchise in Hong Kong and position as the largest foreign bank in China, HSBC is strongly positioned to benefit from the growing level of trade and investment in Greater China and across the region.” HSBC is not the first to take this course. Standard Chartered pioneered the model by buying Hsinchu International Bank last year. On its heels came Citigroup with the acquisition of Bank of Overseas Chinese.ABN Amro followed, taking over Taitung Business Bank, a bankrupt small lender.HSBC and Citi have been eyeing Taiwanese businesses in China for years, setting up desks staffed with Taiwanese in branches close to areas where investment from the island’s manufacturers is concentrated. They have had limited success. These entrepreneurs are navigating a web of often conflicting rules on investment, taxes, accounting on the two sides of the Strait,” says a banker in charge of Taiwanese customers at a multinational bank in Shanghai. The practices that have evolved as a result are often not compatible with the requirements of a global bank. One problem is that many Taiwanese small and medium-sized companies cannot draw on their parents to guarantee loans because group structures are often opaque to circumvent Taiwan government restrictions on investment in China.  With a solid presence in Taiwan, foreign banks could overcome this hurdle, analysts say. A multinational lender that owns a local bank should be able to grab a sizeable portion of the Taiwanese corporate market in China,” says Tony Tsai, head of Moody’s in Taipei. For Taiwan’s domestic banks, that is bad news. “We have managed to hold on to our corporate customers so far, but that won’t work forever, says Daniel Tsai, chairman of Fubon Financial, one of the island’s largest financial services groups. Fubon thought in 2003 that tacit approval would be granted for it to enter China through a Hong Kong subsidiary. The group acquired Hong Kong-based International Bank of Asia that year, and planned to subsequently have IBA – now renamed Fubon Bank (  Hong Kong) – set up branches in the mainland or acquire a mainland lender. But four years later, local banks remain stuck because the government has failed to relax the cross-Strait banking ban. That means that despite consolidation – over the past year, the number of domestic banks has fallen from 45 to 39 after years of standstill – the sector is still plagued by cut-throat competition because local banks are barred from following their customers into China. Following the wave of foreign acquisitions this year, the government understands that this is a growing problem. “People praise us for opening the door to let foreigners in, but if we don’t open another door to let our own banks out, that will be a death penalty for many of them,” says an official at the Financial Supervisory Commission.The FSC has recently revived the idea of allowing Taiwanese banks to access China through Hong Kong subsidiaries. But officials say this still unlikely to materialise before a presidential election in March. By Kathrin Hille

This entry was posted on Tuesday, January 1st, 2008 at 6:34 pm and is filed under China Legal News. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.