Market woes in China and geopolitical tensions have caused Taiwanese banks and other financial institutions to gradually draw down their cross-Strait exposure.

In the first half of the 2010s, Taiwanese financial institutions viewed China as the most promising international market. They had few opportunities to expand in their saturated home market and hoped to boost profitability – EuroMoney described Taiwanese banks in 2010 “as among Asia’s most unprofitable” – by growing in China, Taiwan’s largest trading partner.  

At the time, China was still the fastest-growing major economy in the world, averaging more than 8% annual GDP growth from 2010-2015.  

The trajectory of the Taiwan financial sector’s engagement with China closely reflects the status of the broader cross-Strait relationship, which flourished during Ma Ying-jeou’s presidency (2008-2016). Amid cross-Strait financial liberalization, Taiwanese banks raced into the China market. Their China exposure divided by equity reached a zenith of around 68.5% in 2014, according to credit-rating firm Fitch Ratings. For a time, China was Taiwan’s largest debtor.  

As cross-Strait ties deteriorated in the past few years, Taiwanese banks followed their Taiwanese corporate customers – which form the bedrock of their business in China – in dialing back activity across the Strait. China exposure has fallen continuously from 53.8% in 2017 to a nadir of 28.9% in the third quarter of 2022, according to Financial Supervisory Commission (FSC) data.  

When the trend for Taiwanese manufacturers to shift more of their operations to Southeast Asia accelerated during the pandemic, Taiwanese banks’ China exposure fell further.   

“Cross-Strait banking peaked fast,” notes Cherry Huang, a director at Fitch Ratings in Taipei. She notes that Taiwanese banks’ exposure in China began falling in 2015, mainly due to China’s steady economic deceleration, just five years after the first full branch offices were approved to operate across the Strait. Then, “starting in 2018, the U.S.-China trade dispute and geopolitical tension began impacting [Taiwanese banks’] China exposure,” she says.   

A similar pattern has been seen in the insurance sector. In the third quarter of 2022, the funds invested by Taiwanese insurers in China fell to NT$148.5 billion (about US$5 billion), the lowest in 25 quarters, according to the FSC.  

Though Taiwan’s financial sector began reducing its China exposure years ago, the ruling Communist Party’s draconian zero-Covid policy has turbocharged the exodus. A signature policy of Chinese leader Xi Jinping, zero-Covid has damaged China’s economy and undermined broader business confidence in the country. China’s GDP grew by just 3% in 2022, not much more than the 2.43% growth of the more mature Taiwanese economy. While Beijing has now scrapped zero-Covid, its effect on the economy will linger. 

Political considerations  

Regulatory concerns of Taiwan’s government have also played a part in the financial sector’s approach to China. The questionable accounting practices of some Chinese firms caused the Taiwanese authorities to be wary about the financial stability of Chinese companies doing business with Taiwanese banks. 

“Defaults at Chinese companies have caused the government to watch China exposure very carefully,” Huang says.  

Citing concerns about potential defaulting by Chinese borrowers, both the Ministry of Finance (MOF) and FSC in 2014 conducted investigations into the 10 Taiwanese lenders with the largest exposure to China. The regulators asked the banks to provide detailed information on their loan exposure, investments, and interbank savings with China.  

Besides the FSC’s regulatory role, the government can also exert direct influence on Taiwan’s state-owned banks through the MOF’s controlling position on their boards. Asked at a parliamentary session in December about the need for state-owned banks to reassess risk in China, Finance Minister Su Jain-rong said: “State-owned banks have already been required to actively handle their China exposure appropriately.” 

Commercial banks without government shareholding are more active in the China market than their state-owned counterparts, but their business across the Strait has also been slowing. As of the third quarter of 2022, CTBC Bank had the most exposure to China with NT$173 billion, down 3.8% year-on-year (YoY); Taipei Fubon Commercial Bank was second with NT$104 billion, down 14% YoY; and E. Sun Commercial Bank was third, with NT$88 billion, a decrease of 3% YoY. Cathay United Bank, fourth on the list, lowered its China exposure by 35% to NT$84 billion.   

The broader geopolitical context in Asia is also a major factor for Taiwanese banks when considering their prospects in China. “They used to have a significant exposure to China, but especially given what has happened in Hong Kong, the Taiwanese government is forcing them to reduce their exposure,” says CY Huang, president of Taipei-based FCC Partners, a boutique investment bank.  

While business opportunities are waning for Taiwanese lenders in China, they have to be mindful of client needs as well as the optics of reducing their presence. “You cannot withdraw abruptly from China,” says Huang, who has worked on merger and acquisition deals in Taiwan, China, and Hong Kong for three decades. “You can only gradually reduce your exposure.”   

Future prospects  

A key consideration in the Taiwanese financial sector’s China strategy going forward will be China’s economic performance. The International Monetary Fund (IMF) in January revised China’s 2023 GDP forecast upward to 5.2% from 4.1%, citing Beijing’s decision to end its zero-Covid policy.  

“If the recovery stabilizes, then there is a chance that China exposure may gradually rise,” says Fitch Ratings’ Cherry Huang. She sees China as remaining a key market for Taiwanese banks since it is still the largest offshore production hub for Taiwanese firms. Despite strained cross-Strait relations, more than 42% of Taiwan’s exports still go to China. Taiwan exported US$188.9 billion in goods to China and Hong Kong in 2021.  

However, the fundamental nature of China’s financial services market will present a challenge for Taiwanese banks even if economic conditions are good. Foreign banks have a market share of just 2% in China, despite years of efforts to penetrate the market. Most focus on corporate clients rather than retail banking as the former is more straightforward and less costly, since there is no need to build a large branch network. 

Taiwanese banks in China face “protectionism from the regulator, which wants to protect the local banks, so even if they have a retail banking license, in reality the business opportunity may not be that great,” Cherry Huang says. For that reason, Taiwanese banks focus on serving Taiwanese companies operating in China, and in some cases state-owned companies or leading players in various industrial sectors, she adds.  

Bank SinoPac (China) is one of several Taiwanese lenders offering retail banking services in China. The bank focuses on deposit and wealth-management opportunities, having obtained a renminbi retail-banking license in the fourth quarter of 2020. Its loan book expanded by 26% in 2021, following a 45% gain in 2020 from a low base, according to Fitch.  

“Getting the license is one thing, but whether you can establish a profitable enterprise is another story,” Cherry Huang says. “It will be a long shot for Taiwanese banks in China.”