MARKET ACCESS CONCERNS, NOT POLITICS, DRIVING

C O N F I D E N T I A L AIT TAIPEI 001708


STATE FOR EAP/TC
STATE PASS USTR FOR STRATFORD AND ALTBACH, TREASURY FOR
OASIA/CWINSHIP AND MPISA,
NSC FOR LOI, COMMERCE FOR 4431/ITA/MAC/AP/OPB/TAIWAN

E.O. 12958: DECL: 12/03/2018
TAGS: CH ECON EFIN ETRD PGOV PREL TW
SUBJECT: MARKET ACCESS CONCERNS, NOT POLITICS, DRIVING
CROSS-STRAIT FINANCIAL SERVICE DISCUSSIONS

REF: A. TAIPEI 1647

B. TAIPEI 1705

Classified By: AIT Deputy Director Robert S. Wang for reasons 1.4 (b) a
nd (d).


1. (C) SUMMARY. As Taiwan and China discuss liberalizing
cross-Strait financial service restrictions, there appear to
be clear differences on market access. According to Taiwan
officials, China wants to liberalize under the WTO framework.
This, in the view of Taiwan officials, would give China
relatively open access to Taiwan's market, since it is
largely open to WTO members. China,s financial services
sector, on the other hand, remains mostly closed under the
terms of China,s WTO accession agreement. Although Taiwan
bankers say they are not afraid of Chinese competition in
Taiwan, Taiwan does not want to grant China unfettered access
to its financial services sector while facing restrictions on
the Mainland. Negotiations, which have already started,
should be difficult, but compromise is possible, and -
eventually - probable. END SUMMARY.

Financial Services Next on the Agenda
--------------

2. (C) In last month's SEF - ARATS talks in Taipei,
liberalization of cross-Strait financial restrictions was one
of the priorities set for the next round of negotiations.
Taiwan banks want greater access in China, particularly to
reach Taiwan firms doing business there. Discussions have
already started over a possible Memorandum of Understanding
on Financial Sector Supervision and Regulation between China
and Taiwan. According to the Director General of the
Taiwan,s Banking Bureau, Chang Ming-Daw, Taiwan has already
received a draft MOU from China which, he says, is relatively
straightforward and presents few, if any, problems. DG Chang
and a number of other regulators and industry representatives
told AIT they expect that agreement on an MOU can be reached
relatively quickly, and that such a document can be signed at
the next round of talks in spring 2009 in China. Exact dates
for the talks have yet to be set.

Quiet Meetings in Beijing
--------------

3. (C) Bilateral discussions on financial services issues
continued in late November on the margins of the Cross-Strait
Financial Academic Conference. Taiwan officials travelled to
Beijing ostensibly as advisors and delegates in the Taiwan
delegation. Taiwan,s delegation was headed by Susan Chang,
Chairman of Taiwan Financial Holdings (the state-owned Bank
of Taiwan and affiliates). Chang is also the former Vice
Chairwoman of the Financial Supervisory Commision (FSC).
Also joining the delegation as "Chief Advisor" was Ms. Lee
Jih-chu, the current Vice Chairwoman of the FSC. Although
Lee attended the conference in the capacity of university
professor, she was Taiwan,s most senior delegate. Lee and
Chang were joined by a number of other officials from the
FSC, the Central Bank, the Mainland Affairs Council, and the
Council for Economic Planning and Development.


4. (C) The conference was jointly sponsored by the Taipei
Financial Foundation, a private industry group, and the
Mainland's China Financial Society, an organization under the
People's Bank of China (China's central bank). The
conference has been held every year since 1994, alternating
between Taiwan and China, except for 1999 due to the major
earthquake in Taiwan that year. At this year's conference,
Taiwan's delegation consisted of 116 members, and the PRC had
about 250 participants, the largest ever, perhaps reflecting
the level of interest in the issue. The chairman of the
Taipei Finance Foundation, Chou Wu-tien, told AIT that the
conference is a means for both sides to get to know each
other, make connections, and exchange information. It was
not, he said, a venue for negotiation. Some Taiwan private
economists who participated in the event complained to AIT
that the meeting lacked substance and that few high-level
Chinese officials attended the working sessions. Chairman
Chou noted, however, that this was because Chinese officials,
especially central bankers, were in crisis mode and preparing
to unveil dramatic rate cuts which took effect on November
27, the day after the conclusion of the conference.


5. (C) Even though top Chinese officials absented
themselves from most of the conference, apparently
substantive conversations were occurring offline. FSC
officials acknowledge that FSC Vice Chairwoman Lee and Taiwan
Financial Holdings Chairwoman Chang, who were absent from
most of the conference, met separately with a number of
high-ranking Chinese officials outside the conference. TFF
Chairman Chou told AIT the same thing, also noting that Lee
remained in China until November 28, two days after the
conclusion of the conference, and Chang did not depart until
the 30th.

Market Access is Sticking Point
--------------

6. (C) FSC officials again told AIT this week that both
Taiwan and China are interested in reaching agreement on a
financial services regulation and supervision memorandum of
understanding. Such an MOU would allow Chinese and Taiwan
financial regulators to share information and cooperation on
cross-border supervision, and would be necessary before
allowing their financial services firms to enter each other's
market. There is no such consensus, however, on market
access issues. Currently, Chinese enterprises of any kind,
including banks, are not permitted to operate in Taiwan.
With limited exceptions, Chinese investors are also prevented
from investing in Taiwan. Taiwan banks and financial
services firms are also largely locked out of the China
market, although Taiwan banks service Taiwan firms in China
via their offshore banking units (OBUs) in partnership with
Chinese correspondent banks. Seven different Taiwan banks
have established representative offices in China, but none
have been given permission to open up bank branches. One
Taiwan insurer has established a company in China.


7. (C) An MOU in itself will not automatically grant market
access to either side. This must be negotiated, and appears
to be a sticking point. FSC officials tell us that China
prefers to negotiate market access under the WTO framework,
meaning that Taiwan financial service firms would be granted
entry into the Mainland market on the same footing as other
WTO members. Under the terms of China's WTO accession
agreement, however, China's market remains relatively closed.
Taiwan's market, however, is relatively open. Using the WTO
framework would thus, in theory, grant China's firms more
access to Taiwan than Taiwan firms would have in China.
While a number of Taiwan bankers say they are unafraid of
competition from Chinese banks in the Taiwan market, some
also note that Taiwan needs to negotiate a deal that limits
the ability of huge Chinese banks to buy up big chunks of
Taiwan's relatively small financial services market.


8. (C) Financial services discussions are expected to
continue at the KMT-CCP Forum to be held in Shanghai December
20-21 (Ref B). In regard to economic issues, discussions
will focus on three areas: strengthening cross-Strait
economic cooperation mechanisms, responding to the global
financial crisis and mitigating its impact, and increasing
cross-Strait investment and improving protections for such
investment. Although as reported in reftel, this is not a
forum for negotiation, it may offer a political-level
exchange of views that may smooth the path for additional
negotiations in the lead up to the next SEF-ARATS meeting in
China next spring.


9. (C) Comment: A signed MOU is likely next spring, but it
is not clear if market access issues will be resolved by
then. Like many other cross-Strait deliverables so far, this
is another "first step" that will allow for progress and
perhaps economic benefits, but not necessarily right away.
End comment.

SYOUNG