Taiwan's financial ties with China unravel as ETF market nears collapse

In a stark manifestation of the deepening economic and financial decoupling between Taiwan and China, the world's largest Chinese bond exchange-traded fund (ETF) market is on the brink of collapse.

According to Bloomberg, this rupture highlights the widening gap in relations fuelled by geopolitical tensions, de-risking of supply chains, and China's economic slowdown. Despite the impending critical presidential election in January, the trend of decoupling, from markets to finance and investments, is expected to persist.

ETF Meltdown: A 94 per cent plunge in Chinese bond assets

Add WION as a Preferred Source

Taiwanese ETFs tracking Chinese bonds, once valued at over $58 billion in 2019, have witnessed a staggering 94 per cent decline in total assets under management as of early this month.

The nosedive reflects a broader global trend where funds are fleeing China's bond market due to significant yield differentials with the US. This financial rift mirrors Taiwan's pivotal role in US-China geopolitics, making the outcome of the upcoming election crucial as voters decide between maintaining political independence or seeking closer ties with Beijing.

Changing Dynamics: From promising yields to regulatory shifts

The local market for investing in China-linked fixed-income securities in Taiwan, introduced five years ago, once thrived. Driven by promising yields for yuan-denominated bonds and the credibility of the Chinese government and policy banks as debtors, it faced a turning point with widening US-China yields.

Furthermore, stringent Taiwanese government regulations, requiring insurers to hold at least a BBB- rating, rendered it impossible for them to invest in China-backed ETFs. KGI Securities notes that until these restrictions ease, Taiwanese life insurance firms would need credit ratings from major global agencies to re-enter the market.

Financial Exodus: Taiwanese banks scale back in China

Taiwanese banks have been steadily reducing their financial footprint in China, with exposure to the world's second-largest economy hitting record lows. This withdrawal aligns with a global trend known as "China+1," where firms diversify and set up operations in other regions to manage supply chain risks.

Taiwanese firms, including Cathay United Bank and Fubon Financial Holding, are adjusting their strategies, expanding in Southeast Asia and capping positions in China, respectively.

Investment Slump: Cross-Strait tensions take a toll

Taiwanese direct investment into China has plummeted nearly 40 per cent in the first ten months of this year compared to 2022, poised for the sharpest year-on-year decline since 2019. Increased cross-strait tensions, ongoing US-China trade disputes, and the geopolitical landscape contribute to this significant drop. Analysts believe that even if a Beijing-friendly candidate were to replace President Tsai, the trend of looser ties in terms of foreign direct investment (FDI) and visitor flows is likely to persist.

China's share in Taiwan's exports shrinks

China and Hong Kong's share in Taiwan's total overseas shipments has decreased from 44 per cent in 2020 to 35 per cent in the first ten months of 2023. This shift is attributed to a decline in goods sent from Taiwan to China across various categories.

Rising wages, reduced local subsidies, and geopolitical strains, including Washington's export bans on Beijing, contribute to the diminishing attractiveness of China as a manufacturing hub.

(With inputs from Bloomberg)

WATCH WION LIVE HERE