TAIWAN BANK KEEN TO START BUSINESS IN MAINLAND

C O N F I D E N T I A L SECTION 01 OF 03 SHANGHAI 000026

SIPDIS

TREASURY FOR AMB HOLER, WRIGHT, TSMITH, AND
OASIA - DOHNER, HAARSAGER, CUSHMAN
USDOC FOR ITA MAC DAS KASOFF, MELCHER, MCQUEEN
NSC FOR LOI

E.O. 12958: DECL: 1/14/2034
TAGS: PREL PGOV EFIN ETRD ECON CH TW
SUBJECT: TAIWAN BANK KEEN TO START BUSINESS IN MAINLAND

REF: A) 07 SHANGHAI 102; B) 07 SHANGHAI 621; C) 08 SHANGHAI 526

CLASSIFIED BY: Simon Schuchat, Deputy Principal Officer, U.S.
Consulate, Shanghai, U.S. Department of State.
REASON: 1.4 (b),(d)




1. (C) Summary: The chief representative of a Taiwan bank in
the Mainland expects SEF and ARATS to sign a financial MOU in
March 2009, which would allow his bank to begin operations in
the Mainland by the end of 2009. Lack of RMB/NTD convertibility
and restrictions on RMB lending cast a shadow over business
prospects, but the banker is hopeful cultural ties and a common
business mindset will lure Taiwan firms in the Mainland to
Taiwan banks. Seven Taiwan banks currently have rep offices in
the Mainland and plan to expand to cities with large Taiwan
business communities after the MOU is signed, he said. Mainland
banks are also eager to expand to Taiwan, raising concerns in
Taiwan that the larger Mainland banks will take business away
from their much smaller Taiwan rivals. The banker's main
concern, however, is establishing an internal control mechanism
unique to the Mainland. Local governments in the Mainland have
been supportive and eager to host Taiwan banks. End summary.

Finally, After 6 Years
--------------

2. (C) Econoff spoke in January 2009 with Peter WT Chang, Chief
Representative of Chang Hwa Bank's Mainland operations. Chang
Hwa is a Taiwan bank with its Mainland rep office in Kunshan,
Jiangsu Province, a city with 3000 Taiwan enterprises (See Refs
A, B, C for more on Kunshan and Chang Hwa Bank). Chang Hwa's
rep office was first set up in the Mainland in 2002, but its
conversion into a branch office was impeded by cross-Strait
political tension during former Taiwan President Chen
Shui-bian's tenure. Peter Chang himself arrived in the Mainland
in 2007, taking over from the previous chief representative, and
has been conducting "market investigations" and building local
contacts the past 2 years. Now, after years of waiting, Chang
is optimistic that a financial MOU will be signed by SEF and
ARATS in March 2009, paving the way for Taiwan banks, like his,
to commence business in the Mainland.

Timeline: End of 2009, At the Earliest
--------------

3. (C) Chang said that, even after the MOU is signed, Taiwan
banks will not be able to start business in the Mainland
immediately. He said that current plans call for a 6-month
"application period" (during which the Chinese Government will
review the bank's application) and a 6- month "organization
period" (during which the bank will set up its office, connect
its IT infrastructure, and be subject to government inspection).
Chang hopes that the "application period" will be cut by
several months through negotiation at the SEF-ARATS talks,
allowing his bank to commence operations "by the end of 2009, at
the earliest."

Some Tough Issues Ahead
--------------

4. (C) Chang cited some difficult issues to be worked out at
the SEF-ARATS talk. One is the aforementioned lengthy
application process. Another is the restriction on RMB lending
by foreign and Taiwan banks. Under current rules, according to
Chang, foreign and Taiwan banks have to operate in the Mainland
for 3 years - 2 of which have to be profitable - in order for
the bank to obtain a license to lend in RMB. Even with current
restrictions on RMB lending, Taiwan banks can still offer
services to Taiwan firms using USD, since most Taiwan companies
in the Mainland export to the United States and require letters
of credit in USD, said Chang. He expects RMB lending rules will
be relaxed, since China is already past its 5 year grace period
following WTO accession and will come under greater pressure to
open its banking sector to outside banks.


5. (C) The lack of RMB/NTD (New Taiwan Dollar) convertibility
was another challenge cited by Chang. Chang thinks this issue
will be the most difficult to resolve because of political
implications for both sides. Some in Taiwan fear full
convertibility and the "free flow" of RMB in Taiwan will imply

SHANGHAI 00000026 002 OF 003


that Taiwan is part of China. The Chinese Government is
concerned about possible capital outflows. Although the issue
may be raised at the SEF-ARATS meeting, Chang does not believe
this will be resolved anytime soon.

Taiwan and Mainland Banks Looking to Expand
--------------

6. (C) Despite these challenges, Chang thinks Taiwan banks are
eager to expand in the Mainland and set up branches in cities
with large Taiwan business communities, such as Hangzhou and
Qingdao. Taiwan firms are also keen to do business with Taiwan
banks, he said, because of their "common business language"
based on cultural ties and emphasis on building trust.
Currently, Taiwan firms that borrow from Mainland banks must pay
back their loans every year, regardless of their business
condition, and the banks conduct new (and opaque) annual reviews
before deciding whether or not to renew the loans. This often
leaves Taiwan firms in a state of limbo. Chang thinks Taiwan
firms and Taiwan banks can have relationships based on trust, in
which there will be an implicit understanding that loans will be
renewed automatically as long as the firms' business remains
stable. Taiwan firms would thus feel "more comfortable" dealing
with Taiwan banks, said Chang.


7. (C) According to Chang, 7 Taiwan banks currently have rep
offices in the Mainland - Chang Hwa Bank, Landbank, First Bank,
China Trust Bank, Huanan Bank, Taiwan Corporate Bank, and Cathay
Bank. Three more Taiwan banks with over USD 10 billion in
assets (the minimum required under Mainland rules according to
Chang) are planning to open up branches in the Mainland, said
Chang. He thinks Mainland banks are also eager to expand to
Taiwan. Many already have Taiwan business clients, and
establishing an office in Taiwan would allow these banks to
understand their clients' situation better, said Chang.

Concerns about Competition, Internal Controls
-------------- -

8. (C) Some banks in Taiwan are concerned that, if Mainland
banks open up offices in Taiwan, some Taiwan customers may
switch to their much larger Mainland rivals who may be able to
offer bigger loans at cheaper rates, according to Chang. He
said average profit margins for Taiwan banks (2 to 3 percent)
are already well below that of Mainland banks. With increased
competition on the island, some Taiwan banks are concerned that
margins will become even lower.


9. (C) The biggest concern for Chang, however, is establishing
an effective internal control mechanism unique to the Mainland.
He said even in Taiwan and Hong Kong, which already have
well-established internal control systems in place, there are
cases of employees siphoning off large chunks of money. He
mentioned that several employees of a Taiwan bank in Hong Kong
recently made off with HKD 50 million. Chang admitted he does
not fully understand China's regulatory system. He is concerned
that, if a corrupt local employee makes off with the bank's
money and disappears somewhere in the interior provinces, there
will be no way to track down this individual and obtain local
government assistance.

Impact of Politics
--------------

10. (C) Although political tension in cross-Strait relations
would be bad for the overall business environment, Chang does
not think renewed tension in the future would turn back the
clock on recent progress in the economic/financial front.
However, he speculated that the Chinese Government may be
reluctant to resolve some of the more difficult issues, like
currency convertibility, based on concerns that Ma Ying-jeou
(and the KMT) may not be in power beyond 2012.

Local Government Support
--------------

11. (C) Chang said the local government in Kunshan has been
very supportive of his bank. When rumors spread that First
Bank, a Taiwan bank, would move its Mainland office from Beijing
to Suzhou after the MOU since Suzhou has a larger Taiwan
business community than Beijing, the Kunshan government called
Chang "many times" to confirm that Chang's bank would not

SHANGHAI 00000026 003 OF 003


similarly move from Kunshan to another location. According to
Chang, local governments want to keep Taiwan firms because they
create many jobs, and they understand that Taiwan firms want to
do business with Taiwan banks. Some cities with large Taiwan
business communities, like Suzhou, Hangzhou, and Qingdao, will
thus create incentives, such as tax breaks, for Taiwan banks to
open branches in their cities, said Chang.

Comment
--------------

12. (C) Despite Chang's overall optimism, it is far from
certain that the road ahead will be smooth for Taiwan banks in
the Mainland. Chang did not fully address how the lack of
RMB/NTD convertibility and restrictions on RMB lending would
affect his business. However, based on our other conversations
with Taiwan businesspeople in the Mainland, Taiwan firms seem
eager to do business with Taiwan banks, citing the annual review
by Mainland lenders as a source of frustration. (Note: Several
Taiwan businessmen in Kunshan mentioned that, of all the
agreements from recent cross-Strait talks, the relaxation of
restrictions on Taiwan banks would have the biggest direct
benefit for their operations. See Ref C. End note.) However,
it remains to be seen how quickly Taiwan banks in East China
will be allowed to lend in RMB and how this will affect their
business relationship with Taiwan firms in the area,
particularly as Taiwan firms cope with the current economic
downturn.
CAMP