TAIPEI: Taiwan has signed a financial service pact with the mainland, the government said yesterday, allowing its banks to tap the mainland's massive market and paving the way for banks from both sides to invest in each other.

The much-anticipated pact, or memorandum of understanding (MOU), will mainly cover cross-Straits financial supervision and is expected to take effect within two months, Taiwan's Financial Supervisory Commission said in a statement.

Taiwan also aims to complete regulatory amendments to allow mainland banks to invest in the island's lenders, the commission's chairman Sean Chen told a news conference, which analysts said will help boost Taiwan's financial shares.

The issue of most concern to investors - details for Taiwanese and mainland financial firms investing in each other - will be discussed in a trade pact known as the economic cooperation framework agreement (ECFA).

However, mainland financial institutions hoping to invest in Taiwan will not be subject to World Trade Organization (WTO) rules or receive the treatment enjoyed by local banks, Financial Supervisory Commission (FSC) Vice Chairwoman Lee Jih-chu said yesterday.

Mainland financial institutions in Taiwan will be treated as neither foreign institutional investors nor as their local counterparts, in order to minimize the impact on the development of the local financial sector or its investment prospects on the mainland, Lee told a joint meeting of the legislative economic and energy committees while reporting on the cross-Straits MOU on financial supervisory cooperation.

Lee said Taiwan should not grant mainland financial institutions the same treatment as that stipulated in the WTO regulations and she predicted that there will be no disputes on the matter as long as both sides accept the terms they agree upon.

Taiwan has not opened its market to many of the mainland products required by WTO regulations, she noted, adding that to fend off an impact, mainland banks, insurance and securities companies cannot be treated like foreign investors or their Taiwanese counterparts.

The opening to either side's financial service sector will be discussed in upcoming bilateral talks on a proposed economic cooperation framework agreement (ECFA), she added.

The optimism over a potential MOU gave a boost to a strong 2.1 percent rally of financial shares in the day's trading on the Taiwan Stock Exchange.

Taiwan's banks will be late comers to the mainland's booming market, which is dominated by powerful local and global players such as Bank of China and HSBC.

While the island's lenders such as Fubon and Chinatrust are strong in consumer banking businesses such as credit cards and wealth management, they won't be able to compete head-to-head with the mainland's biggest players in the near term, analysts have said.

"The signing of the MOU is just the beginning of financial cooperation on both sides," said Chu Yen-min, senior vice president at Taiwan's KGI Securities.

"We're expecting more opening in the financial sector when both parties sign the ECFA agreement," Chu said.

Taiwan's banking and insurance sub-index has jumped 55 percent so far this year on expectations the MOU will help banks establish a foothold in the mainland market.

The main index has climbed 70 percent during the same period.

China Daily/Agencies

(HK Edition 11/17/2009 page2)