Currency deal paves way for Taiwan as yuan trading center

Taiwan banks will be allowed to start handling the yuan this year under an agreement signed yesterday, paving the way for the island to become an offshore center for yuan trading. After the deal becomes effective in two months, Taiwan banks will be able to take yuan deposits and convert yuan into New Taiwan dollars.

The conversion will allow Taiwan investors on the mainland to cut foreign exchange costs by skipping the current process of first converting their yuan earnings into US dollars.

The two sides agreed to set up such a mechanism according to the principle and cooperation framework set in the memorandum, the mainland-based People's Bank of China announced in a statement.

The memorandum is expected to come into effect in 60 days, according to Perng Fai-nan, who represented Taiwan in signing the memorandum.

"The date when the memorandum comes into effect will mark the official formation of the cross-Strait currency clearing mechanism," said the statement quoting an unnamed People's Bank of China spokesman.

The mechanism will be improved with future cooperation, it said.

Under the memorandum, the two sides will each designate a clearing bank to carry out currency settlements and liquidations for the other side, and the clearing banks will be able to carry out cash exchanges of currencies from the two sides in accordance with relevant supervision laws and regulations.

The spokesman said that so far the mainland-based Bank of China and Bank of Communications had set up branches in Taipei, and the People's Bank of China will choose one of them as the designated clearing bank.

The opening-up and development of yuan transactions in Taiwan will be a new business growth point for the island's financial sector. It will also expand the investment area for the island's residents and firms, according to the spokesman.

Yang Yi, a spokesman for the State Council Taiwan Affairs Office, said the memorandum was another important step for cross-Strait financial cooperation.

A cross-Strait currency clearing mechanism will lower the cost of currency exchange and the risk of exchange rate fluctuation for business and people on both sides, Yang said. It will facilitate cross-Strait investment and trade and expand economic cooperation.

The move is a response to the calls and expectations of people on both sides and is mutually beneficial and of great significance for economic development on both sides, Yang said.

"We are hoping currency regulators on both sides will speed up follow-up preparation work and start cross-Strait currency clearing operations as early as possible," he said.