Taiwan banks want higher investment limit for China peers

* Banks urge China investment cap rise to 20 pct vs 5 pct

* Taiwan regulator to meet China counterpart before June

* China business crucial for Taiwan banks' growth

* Taiwan banking stocks up 10 percent this year on China hopes

By Faith Hung

TAIPEI, Feb 9 (Reuters) - Taiwanese banks are urging regulators to raise a cap on stakes Chinese banks can hold in them to 20 percent from 5 percent as they push to get a bigger share of the huge mainland market at a faster pace and offset a lack of growth opportunities at home.

The head of the island's Financial Supervisory Commission (FSC) met on Wednesday with the heads of several local banks ahead of a meeting due before June with his mainland counterpart at the China Banking Regulatory Commission (CBRC).

Bankers said raising the investment limit was high on their agenda as it would make Taiwan banks much more attractive for mainland peers and would lead to further reciprocal opening by China.

"It would be a good gesture to China, and in return for more opening to business on the mainland," said Chen Mei-tsu, an executive vice president of Taiwan Cooperative Bank.

Access to the huge mainland market has been a key focus for Taiwan's banks, struggling to grow in a saturated home market and with little international presence. They are set to post a 0.53 percent return on assets (ROA) in 2011, the lowest among banks in Asia excluding Japan, according to Fitch Ratings.

A higher limit would allow Taiwan banks to leverage the resources of Chinese banks, which are much bigger in size and assets.

"It's like having a rich dad instantly," said K. H. Lin, a fund manager of Yuanta Securities Investment Trust. "Taiwan banks can accelerate their exposure in China very quickly."

A landmark trade pact in June 2010 opened up the China market to many Taiwan industries and held out the promise of a surge in new business for the island's financial sector.

But progress has been slow, constrained by acute sensitivity in Taiwan over potential inroads into the finance sector by China, which despite warm business ties remains a political rival and even a possible military foe with a stated ambition to take Taiwan back.

Only seven Taiwan banks have operations in China, and only in niche areas including insurance and lending to Taiwan firms.

The agreement allowing Chinese investment of up to 5 percent in Taiwan banks itself didn't go into effect until January, some 19 months after the trade deal.

PRESSING NEED FOR ACCESS

With regional and global banks also targetting China -- Singapore's DBS Holdings Group said this week it sees greater China making up a third of total revenue this year -- the need for Taiwan's banks to find a way to get more access is pressing.

"If a stake investment does not get you some management control, the incentive is not good enough," said one bank executive, who asked not to be identified due to the sensitivity of the matter.

"In this case, 20 percent can do that, while the current 5 percent is really nothing," said the executive.

There have been signs recently however of renewed activity in the sector after a quiet 2011.

The FSC recently approved the opening of Taiwan branches by China's Bank of China and Bank of Communications . Taiwan's Hua Nan, meanwhile, is seeking a 20 percent stake in China's Fujian Haixia Bank.

Financial shares are up 10.8 percent this year, partly on hopes for better China ties, and in line with the broader index's 11 percent gain.

FSC Chairman Chen Yuh-chang met on Wednesday with the heads of Cathay Financial and five state-run banks, including Mega Financial Taiwan Cooperative Bank and Hua Nan.

The FSC is also scheduled to meet other private financial holding firms, such as Fubon Financial, on Feb 14, according to industry sources.

Chen is due to meet CBRC Chairman Shang Fulin before June, with the investment cap on the agenda as well as issues including loans to small and medium enterprises and asset quality control.

It would be the third meeting between regulators on both sides since the June 2010 trade deal. (Editing by Jonathan Standing)