Taiwan to allow banks to invest in China banks

TAIPEI (Reuters) - Taiwan opened the door for banks to invest in lenders in China on Wednesday as the ruling party sought to revive support from the business community ahead of presidential elections next week.

Investors see the vast China market as one of the best growth opportunities for Taiwan financial firms, such as Cathay Financial (2882.TW), which face stiff competition in their mature home market.

The timing of the move just 10 days before the March 22 presidential election is clearly aimed at winning votes for the ruling Democratic Progressive Party (DPP), which is struggling in the polls, analysts said.

Business leaders have been waiting patiently for the opening for years, eyeing the fast growing China market as they aim to better serve Taiwan firms that have pumped an estimated $100 billion into the mainland economy over the last 20 years.

"The opening marks a milestone for Taiwan's banking industry," said Jeff Chang, president of the fund arm of Cathay Financial, Taiwan's top financial holding company. "It's going to take two to three years to see a real earnings impact, though."

The planned opening, expected to be approved by China soon, sent the Taiwan stock exchange's financial sub-index .TFNI up nearly 1 percent. The main TAIEX index rose 0.6 percent.

Investor optimism that the elections will lead to a more pro-business stance towards Beijing has fanned a 14 percent rally in the sub-index this year, while financial shares elsewhere have tumbled on fears of a U.S. recession and credit market turmoil.

Stronger business ties with the mainland could also boost the island's economy, whose weakness relative to others in Asia has worked against the pro-independence Democratic Progressive Party (DPP) of outgoing President Chen Shui-bian ahead of elections.

China sees Taiwan as a renegade province that must be ultimately reunified with the mainland, by force if necessary.

But despite political differences, China has been the favorite overseas destination for Taiwan firms and is also the island's top trading partner.

Analysts see the decision, coupled with a similar relaxation of another investment restriction last week, as an attempt by the DPP to shore up support for its trailing presidential candidate, Frank Hsieh, said Steve Chen, a professor at Chang Jung University.

"Otherwise they wouldn't do this now," he said. "It's for the big business people and the ones in China.

Taiwan has imposed the banking ban, investment caps and other restrictions on local businesses over the years to keep them from becoming overly reliant on China.

Opinion polls show Ma Ying-jeou, the candidate of the China-friendly opposition Nationalist Party (KMT), as the frontrunner. Ma has promised steps to help Taiwan get a bigger stake in China's economic boom, while -- until now -- the DPP had tended to drag its feet.

OFFSHORE UNITS

Premier Chang Chun-hsiung said banks in Taiwan, Asia's fourth-largest banking market, will be able to invest in Chinese counterparts via offshore subsidiaries. He declined to give a timetable.

"It's the easiest way to do this, via a three-way agreement," said Jong Huey-jen, deputy director general of the Financial Supervisory Commission's banking bureau.

Taiwan has about 40 banks, but only the top 10 are expected to pursue mainland investments, which are likely to be small- to medium-sized regional lenders in coastal provinces with lots of Taiwan businesses.

That strategy would differ from major global banks, which have sought stakes in much larger players with an eye to building up business among both local Chinese and multinational clients.

The announcement comes just a week after the cabinet said it would loosen a cap on Taiwan companies' investments in China, following years of complaints from local businesses that restrictions undermine their competitiveness.

Taiwan's Fubon Financial (2881.TW) has long been rumored as planning to buy up to 20 percent of Xiamen City Commercial Bank in Fujian province once such investments are allowed.

Fubon President Victor Kung said at a separate event that the company would start the application process as soon as possible, but did not disclose the name of Fubon's partner.

China's top banking regulator Liu Mingkang said last week that Taiwan banks can tap the mainland market if they operate according to mainland rules.

Taiwan's financial stocks, whose valuations have been among the region's lowest for years due to a consumer credit crisis and stiff competition, have recently been embraced by foreign buyers who see them as a springboard into the China market.

The new rule will likely speed up investments by banks on opposite sides of the Taiwan Straits.

Fubon shares have risen 18 percent so far this year, while Cathay Financial is up about 15 percent year to date.

(Additional reporting by George Chen in Beijing and Ralph Jennings)