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Taiwanese banks will be allowed start handling China's tightly controlled currency this year under an agreement signed Friday, paving the way for the island to become an offshore center for yuan trading.
After the deal becomes effective in about two months, Taiwanese banks will be able to take yuan deposits and convert yuan into the New Taiwan dollar. The conversion will allow Taiwanese investors on the mainland to cut foreign exchange costs by skipping the current process of first converting their yuan earnings into U.S. dollars.
The long anticipated memorandum of understanding was signed separately by Governor Zhou Xiaochuan, the head of the People's Bank of China in Beijing and his counterpart, central bank governor Perng Fai-nan in Taipei.
"We will continue to work with the other side so this service can be open as soon as possible," Perng told reporters in Taipei, noting that clearing banks are yet to be picked by either side for the conversion.
Perng said the deal will also clear the way for Taiwanese banks to tap into new businesses, such as yuan-denominated bonds or derivatives.
Those lucrative activities are now handled by Hong Kong banks or underground local lenders.
Taiwan hopes the deal will enable it to develop into another yuan offshore center after Hong Kong. London and Singapore are among cities seeking to develop a similar yuan market.
Perng said local banks will have to significantly build up the amount of their yuan trading before the offshore market is established.
Taiwan has a clear advantage in this regard — its $150 billion annual bilateral trade with China, with about $80 billion in Taiwan's favor.
The trade volume was built mainly on the more than $120 billion which Taiwanese have invested on the mainland over the past three decades.
China is gradually relaxing its tight foreign exchange control, and the slow progress has given rise to the business of yuan offshore centers.
Taipei has pushed Beijing for signing a currency clearing pact as the former political foes eased their hostilities in recent years to promote stronger economic ties. The two sides split amid civil war in 1949, but Beijing still claims the self-ruled island a part of its own territory.
Taiwan also hopes to attract wealthy Chinese to park their yuan funds on the island, said Norman Yin, professor of finance at Taiwan's National Chengchi University, noting that China has seen an increasing amount of capital outflow despite its foreign exchange control.
"Compared with Hong Kong, Taiwan has more advantage in the wealth management business because its transactions do not come under China's watchful eyes," Yin said.