Taiwan ETF (EWT) Whipsawed

By Carl Delfeld of Chartwell ETF and Emerging Markets Alpha

Taiwan's market (EWT) is up 65% so far this year but has been whipsawed this week as a a financial services agreement between Taipei and the beijing mandarins disappointed Taiwan banks and investors. 

Taiwan's closer relationship to China has been the linchpin of the market rally backed by an 88% increase in investment from the mainland by 88%. Bloomberg reports that wealthy Taiwanese are also repatriating assets. 

Yesterday, five months after the original deadline, the Financial Times reports that Taiwan and Beijing finally signed a memorandum of understanding late on Monday,
effective mid-January. But as investors digested the details, the
disappointment was palpable: $1.4bn, or about 3 percent, was wiped off the
market capitalisations of Taipei’s five biggest financial services groups on
Tuesday. Two-month futures on the bank and insurance sector dropped three times
more than the benchmark.

There are only modest breakthroughs. Taiwan’s
banks should be free to upgrade Chinese representative offices to branches, for
example, and can now invest directly in the mainland, rather than having to
route through overseas subsidiaries. But the MoU does not provide a platform
for Taiwanese banks to operate A-share brokerage services or any form of
renminbi banking businesses. And the most significant prize – allowing banks to
take equity stakes in each other – has been passed off to a separate Economic
Co-operation Framework Agreement (ECFA), to be hammered out next month.

Any progress is of course welcome but this MOU could pour cold water on those expecting dramatic progress. While China’s interest in Taiwan’s small and
saturated markets is more symbolic than economic – state-owned ICBC is more
than four times bigger by assets than Taiwan’s top five lenders combined –
Taiwan really needs this. Consolidation among the island’s 37 domestic banks could be accelerated
by allowing cross-ownership with mainland lenders. The economy remains leveraged
to manufacturing, accounting for more than a fifth of gross domestic product:
the first quarter’s contraction in output of more than 10 per cent was Taiwan’s
worst ever.