Taiwan praises currency memo with mainland

TAIPEI - Taiwan's authorities, experts and media have praised a direct currency clearing memorandum with the Chinese mainland announced simultaneously in Beijing and Taipei on Friday.

The deal, signed by the monetary authorities of the mainland and Taiwan, calls for direct currency clearing between the two sides, a move expected to reduce trade costs and risks of exchange rate fluctuations.

Taiwanese leader Ma Ying-jeou said shortly after the announcement that the signing of the memorandum would greatly help cross-Straits financial cooperation.

He added the deal testifies to mutual trust between Taiwan and the mainland.

For many experts in Taiwan, the increasing importance of the Chinese yuan in global trade and investment means fresh opportunities for the island, given its close business and cultural ties with the mainland.

Chien-Fu Jeff Lin, a professor with Taiwan University Department of Economics, said the direct currency clearing called for by the memorandum will enable Taiwan to eventually become an off-shore yuan center.

He said that the mainland's economic development has created great demand for yuan transactions and this trend calls for more off-shore yuan centers other than Hong Kong.

The Chinese yuan is not a fully convertible currency yet. But as the mainland's economic and financial power continues to grow, international demand for yuan has increased in the past few years.

Hong Kong has been gradually evolving into a major off-shore yuan center, where financial institutions can roll out yuan-denominated services and products.

The Asian financial center, with a world-class legal and regulatory framework, has attracted international and even mainland companies to raise funds in yuan to finance their trade and investment operations on the mainland.

These deals have brought new business opportunities for Hong Kong's financial sector.

For Taiwan, the benefits of direct currency clearing with the mainland and the prospects of becoming an off-shore yuan in the future are multi-faceted.

Taiwan's consumers and companies have parked savings of up to 31 trillion New Taiwanese Dollars ($1 trillion) with banks and other financial institutions. With direct cross-Straits currency clearing, these funds can be at least partly converted into yuan and thus enjoy higher returns as the benchmark interest rates on the mainland are currently higher than those in Taiwan.

Chang Chinyuan, a spokesman for SinoPac Holdings, said that when financial institutions offer yuan-denominated financial services and products, Taiwanese people will have more investment options and pensioners can expect higher returns on their savings.

Taiwan's media have also largely supported the cross-Strait currency clearing memorandum, eyeing greater financial cooperation between the two sides in the future.

Economic Daily News said in an editorial that direct currency clearing is a mutually beneficial move as it will help the mainland's drive to expand overseas use of yuan and at the same time consolidates Taiwan's position in the global financial system.

The newspaper added in another commentary that the memorandum amounts to offering the island a ticket to the club of off-shore yuan centers.

Meanwhile, the Commercial Times noted that direct currency clearing will greatly reduce cross-Strait trade costs, and yuan-denominated financial services and products in the future will become a new source of revenue for the island's financial sector.

According to a 2009 cross-Straits financial cooperation agreement, the currency clearing service is only applied to cash exchanges.

Currently, banks from both sides can choose clearing banks in Hong Kong or Macao to carry out currency settlements and liquidations. This takes a longer time and is more trouble, especially concerning the shipping of notes.

Also, lenders on the Chinese mainland and Taiwan can rely on correspondence banks located elsewhere to provide services for settlement and clearance of trade and investment across the Taiwan Strait.

Financial institutions from both sides have long called for a direct clearing system between banks across the Strait and for expanding the services on remittance.

The memorandum is believed to be of particular importance as cross-Strait trade and investment ties have developed rapidly in recent years.

According to official figures on the mainland, cross-Strait trade reached $160.03 billion in 2011, marking a year-on-year increase of 10.1 percent.

Meanwhile, by the end of last year, the mainland had approved a total of 85,772 investment projects from Taiwan and the actual funds used reached $54.2 billion.

The memorandum will take effect in 60 days and the two sides are also working toward an eventual currency swap deal.

The memorandum with Taiwan is part of a massive plan by the Chinese mainland to expand the use of its currency overseas.

It has signed numerous currency deals with trade partners across the world, including the Republic of Korea, Japan, Singapore and Britain, to facilitate cross-border trade and investment.

Many economies are eager to ink currency deals with the mainland to further take advantage of the trade and investment opportunities in the country, which is the world's second-largest economy and has maintained strong economic growth for more than three decades.

These deals are also expected to reduce the world's heavy reliance on the US dollar.

The greenback remains the dominant currency of the global reserve system and is widely used in trade and financial deals around the world, but it has also seen increasing volatility as the United States has struggled to emerge from a severe financial and economic crisis in the past five years.