RMB Exchange Services Up and Running

To better serve mainland Chinese tourists as well as all ROC citizens, exchange operations in and out of RMB officially began at 14 Taiwanese banks on June 30.

On June 12 the Legislative Yuan amended Articles 38 and 92 of the Act Governing Relations Between the Peoples of the Taiwan Area and the Mainland Area, authorizing the Central Bank of the ROC and the Financial Supervisory Commission to draw up regulations governing the clearance and settlement of RMB in the Taiwan Area prior to the signing of any agreement, or the establishment of any mechanism, for RMB clearance and settlement between the two sides across the Taiwan Strait.

After years of waiting, the RMB can at last legally see the light of day in Taiwan.

Now a person can exchange up to RMB20,000 per transaction (with no limit on the number of transactions) at 1,204 branches of 14 Taiwanese banks, including the Bank of Taiwan and the Land Bank of Taiwan, as well as at 67 foreign exchange offices at airports, in 46 hotels, and in 15 department stores. For Taiwanese all that is required is a national ID card and for non-Taiwanese a passport or residence certificate.

Popular tourist spots in Taiwan, like the National Palace Museum, will also accept RMB for transactions in addition to US dollars and Japanese yen. The exchange rate will be based on the official bank rate of the day of transaction.

In fact under the DPP administration both government and opposition worked together to hasten the introduction of RMB exchange facilities. But because the previous administration was unable to conclude a clearance and settlement agreement with the mainland, RMB exchange was put off out of political and financial risk considerations.

Christina Liu, former People First Party legislator and now chief economic advisor at the Daiwa Institute of Research, points out that "the word 'agreement' in international parlance is a very sensitive political term. It involves the 'state-to-state' issue and inevitably draws one into the 'insoluble equation' of the 'one-China' principle."

To break the political deadlock, after the new government came to power, KMT finance and economic legislators re-introduced proposals to revise Article 38 of the cross-strait relations act, changing the words "conclude an agreement" to "establish a mechanism" for currency clearance and settlement. This small change solved the problem.

Although the issue is nominally resolved, risks remain. As Taiwan is not a UN member, it is excluded from various international currency clearance and settlement mechanisms. Furthermore, the RMB is a controlled currency and not freely traded internationally. Taiwan banks that offer RMB exchange services need to cover their RMB transactions with a reliable clearance and settlement bank, so as not to risk being left with insufficient supply of the currency.

Furthermore, if the RMB brought in by mainland visitors cannot be examined at official exchange locations, counterfeit bills might flood the market. This would not only mean financial loss for ordinary citizens, but would threaten Taiwan's financial stability.

Nevertheless, Taiwanese make as many as 4.62 million visits to the mainland each year, and based on spending of RMB20,000 per person, this means a demand of RMB90 billion. Currently at most some 3,000 visitors a day come to Taiwan from the mainland, and according to mainland regulations each traveler can bring no more than RMB20,000. If all this money were exchanged, this would be about RMB60 billion entering Taiwan. That represents a net outflow of RMB30 billion. Officials at the Central Bank worry that an adequate supply of RMB is still a thorny problem.

But some financial and economic legislators feel that regardless of how much the banks take in or sell, they will find a balance. Hong Kong's experience was that they opened up banking before 1997 to small RMB exchange transactions. Only after 2003, when the People's Bank of China established its first overseas branch in Hong Kong and designated it an international clearance and settlement bank did China sign a memorandum on cooperation with Hong Kong banks in clearance and settlement.

On October 3, 2005, Kinmen and Matsu, with close cross-strait ties resulting from the "small three links" policy, began to exchange RMB following the Hong Kong model on a trial basis. RMB was primarily bought from HBSC and the Bank of America in Hong Kong via the Kinmen branch of the Bank of Taiwan. Banks on Taiwan initially are also purchasing RMB cash with US dollars from these two major foreign banks.

As for the current trend, the prospect is for a continued rise in the value of the RMB, which is in high demand. Whether in the future, in addition to buying RMB for their immediate needs, Taiwanese will be able to hold RMB in bank deposits awaits further negotiations on the flow of bank funds across the strait.