BANKING: Cross-Strait Tensions Kill Citic Bank Tie-Up

Bottom line: The collapse of a cross-investment between China’s Citic Bank and Taiwan’s CTBC Financial reflects growing cross-strait tensions, and could signal a chill in major new cross-strait investments over the next 4 years.

Citic Bank scraps Taiwan investment

In a troubling sign for companies doing business across the Taiwan Strait, an equity swap between China’s Citic Bank (Shanghai: 601988) and Taiwanese peer CTBC Financial (HKEx: 2891) has collapsed due to regulatory issues. In this case it appears that Taiwan scuttled the deal for reasons I’ll explain shortly, though a Citic spokesman emphasized no politics were involved. But regardless of the stated reasons, this particular development seems to reflect growing tensions between Taiwan and China under a new Taiwanese administration that’s far more wary of Beijing than its predecessor.

This latest development certainly doesn’t bode well for future business ties across the Taiwan Strait, especially deals involving cross-border investment. Taiwan’s new President Tsai Ing-wen, who took office in May, has previously questioned a series of planned Chinese investments in Taiwan’s semiconductor industry, casting doubt on whether they will get ever get completed.

Now this latest development is casting doubt on the potential for cross-strait investments in the financial sector, another sensitive area that’s fertile ground for such activity due to the huge volume of business and trade between Taiwan and the mainland.

According to the latest reports, Citic Bank and CTBC are saying they had to scrap their landmark deal for regulatory reasons. (English article; Chinese article) A Citic Bank official said the decision was made after Taiwan’s financial regulator informed the pair that the Chinese bank failed to meet a requirement that it must have branches in OECD countries for at least 5 years before making its planned investment.

Few Chinese banks can probably meet that requirement, since most operate only in China, though some of the larger ones have branches in nearby Hong Kong. Two of the few who would qualify for such investments are ICBC (HKEx: 1398; Shanghai: 601398) and Bank of China (HKEx: 3988; Shanghai: 601988), China’s 2 most globally focused banks, which have been active in both developing and western markets for at least a decade.

Citic and CTBC signed their deal in May last year, at which time CTBC, Taiwan’s leading credit card issuer, agreed to pay T$11.67 billion ($370 million) for Citic Bank International, the global unit of Citic Bank. In exchange, Citic Bank would have purchased 3.8 percent of CTBC for an undisclosed price.

Second Collapse

The development marks the second collapse of a financial services sector investment across the Taiwan Strait. Last September, ICBC announced it was abandoning its plan to buy 20 percent of Taiwan’s Sinopac Financial (Taipei: 2890) for about $600 million. In that case the 2 sides extended the deadline for closing the deal once, but finally abandoned it after observing that curbs against mainland investment in Taiwan’s banking sector weren’t progressing as they had hoped.

While the 2 sides in this latest case are emphasizing that politics didn’t play a part in the deal’s collapse, it’s hard to believe they weren’t at least a small factor. Taiwan’s new president has a testy relationship with Beijing due to her party’s independence-leaning stance. By comparison, its previous president was much more China friendly and readily concurred with a “one China” principal that states there is only one China that includes Taiwan.

Before taking office in May, the current President Tsai also expressed concern about several proposed major investments in Taiwan’s high-tech chip industry by a group of companies based at China’s prestigious Tsinghua University. (previous post) None of those deals have been officially scrapped yet. But this latest cancellation of a banking deal seems to indicate that tensions could remain high between Taiwan and China for the next 4 years, making the signing of any major new cross-strait investments unlikely.

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