China and Taiwan open trade links amid protests

During a five-day visit to Taipei by a top mainland Chinese delegation, China and Taiwan have signed a pact to open trade and transport links.

The trip has provoked clashes between riot police and protestors who accuse Taiwan's president Ma Ying-jeou of selling out by signing agreements with China's top Taiwan negotiator Chen Yunlin.

Meanwhile, supporters of the deal hope it will improve cross-strait ties and address an economic slowdown triggered by waning intra-Asia trade flows.

Cross-strait exchanges could spell significant changes for the banking landscape, say finance experts, who hope the agreement will eventually lead to a liberalisation of capital flows.

“To date, because of the lack of cross-strait banking services, foreign banks had an advantage over the local banks for trade finance operations,” says Tony Phoo, an economist at Standard Chartered in Taiwan. “However by allowing direct cooperation on cross-strait banking, this could level the playing field for both foreign and local banks.”

Hong Kong-based trade financiers currently issue letters of credit and raise collateral for Taiwanese clients looking to do business in China. This could change with further liberalisation of the banking sector between the two sides.

“If the banking system opens and helps to facilitate more trade between China and Taiwan, this would impact the business of Hong Kong banks which have traditionally been the middle man in China/Taiwan trade as all letters of credit have to be issued from here,” says Christopher Lewis, head of trade and supply chain for Greater China at HSBC.

“However banks in Taiwan would subsequently benefit from what is likely to be an uptick in direct business if cross-strait links strengthen. This benefits all parties because trade efficiencies reduce the cost of financing,” he adds.

The current trade agreement will also help to lower costs for the companies involved. Standard Chartered points to local reports which suggest that savings on operating expenses for direct shipping and direct flights could add up to $90 million per year. The reports estimate that annual savings will amount to $39 million for direct air cargo flights and $36 million for shipping operators, bringing the total to around $165 million per year. (This is equivalent to around 0.04% of Taiwan’s current GDP.)

Goods exported from Taiwan to China include electronics, chemicals, machinery, base metals and cement. Taiwan's economic growth has, however, lagged behind China’s in recent years as trade exports have slowed. It is difficult to track these numbers as the Taiwanese are still barred from making direct imports from China; thus there is no available data to capture import flows. Experts say this could change as shipping lines are opened.

Fears that liberalisation of trade links between Taiwan and China will have repercussions for Hong Kong have been downplayed by economists, as the former British colony is expected to continue to have a strong hold over business and trade in the Pearl River delta region in Southern China.

“A lot of trade between Taiwan and China tends to be in the electronics sector, which is typically transported by air freight,” says Ben Simpfendorfer, chief China economist at RBS Global Banking and Markets.

“Hong Kong is the world’s largest international air cargo hub, so it will still capture some of the trade that goes through Guangdong province. Liberalising trade links will help to create a southern hub between China, Taiwan and Hong Kong,” he says.

However, additional challenges lie ahead for the region, particularly from a US government led by Barack Obama, who maintains a more protectionist trade stance and has pledged to rebalance the country’s economic relationship with China.