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September 20, 2017

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Taiwan faces difficulty in becoming renminbi offshore financial center

TAIPEI, Taiwan -- While Taiwan has the edge in developing a Chinese yuan offshore financial center, there are many obstacles ahead, such as capital flow constraints and the delay in signing cross-strait trade pacts, local experts said.

Ever since the deposit of Chinese yuan was approved in Taiwan over a year ago, the deposit level has reached 29 billion yuan, surpassing that in Hong Kong, where renminbi deposits were introduced over seven years ago. Taiwan's fast Chinese yuan accumulation is the result of a US$300 billion per year trade surplus that Taiwan enjoys with China.

According to Central Bank Governor Perng Fai-nan (彭淮南), Taiwan holds the edge in becoming a Chinese yuan offshore financial center. The reason is that Taiwan will establish service and goods trade pacts with China, and possesses better international settlement capability compared with other places such as Singapore and London.

Competition in Becoming Offshore Financial Center

Despite the massive amount of renminbi deposits, it has limited impact on the New Taiwan dollars deposited in Taiwan. According to Perng, Chinese yuan deposits in Taiwan account for a mere 4 percent of total local deposits. The percentage is much lower than that of Hong Kong. As such, the concern that Taiwan's economy will be dominated by China is unfounded, Perng said.

With the Chinese yuan's increasing popularity as the currency of choice in global transactions, a number of countries have expressed willingness to become Chinese yuan offshore financial centers. Hong Kong, Macau, Taiwan, Singapore and London have already established such centers. In Europe, Frankfurt, Germany is also interested. France, Luxemburg and Seoul, on the other hand, have either signed or are in the process of inking related agreements with China.

Taiwan's Obstacles

Academia and financial businesses pointed out that there are hurdles preventing Taiwan from turning into a Chinese yuan offshore financial center. Without the passage of the Cross-Strait Trade in Services Agreement or a goods trade pact, and without the Renminbi Qualified Foreign Institutional Investor (RQFII) qualification, there is still a long distance to go, they argued.

Obtaining RQFII standing is tied to the inking of the service trade pact, the passage of which aroused much controversy and has since been delayed. The inking of a cross-strait currency swap deal scheduled for this year has also been delayed.

While the amount of Chinese yuan deposits continuing to grow, there are few ways to move capital around, said financial experts.

Chinese Yuan's Increasing Popularity

According to a report recently released by the Institute of International Finance, the use of Chinese yuan in financial markets around the world has doubled over the past year.

While transactions in Chinese yuan are extremely low (1.4 percent) compared with U.S. dollars (31 percent) and euros (42.5 percent), it ranks No. 6 in global trade, equivalent to that of the Swiss franc.

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