Mainland Affairs Council

Statement on the passage by the Legislative Yuan’s Home and Nations Committee of the first reading of the draft amendment proposed by Legislator Lee Jih-Chu and other legislators to Article 36 of the "Act Governing Relations between Peoples of the Taiwan Area and the Mainland Area"

1. On November 9, 2006, the Legislative Yuan’s Home and Nations Committee passed the first reading of the draft amendment to Article 36 of the “Act Governing Relations between Peoples of the Taiwan Area and the Mainland Area” (hereinafter referred to as “the Act”). The key points of the draft amendment to Article 36 are as follows: Under proposed Paragraph 1, Article 36 of the Act, the Financial Supervisory Commission (FSC) of the Executive Yuan will replace the Ministry of Finance (MOF) as the authority responsible for permitting direct business dealing between any financial, insurance, securities or futures institution of the Taiwan Area or any of its branches in any country or area outside the Taiwan Area with any individual, juristic person, organization, or other institution of the Mainland Area or with any of its branches in any country or area outside the Mainland Area. Under proposed Paragraph 2, Article 36 of the Act, the FSC will also replace the MOF as the authority with which any financial, insurance, securities or futures institution of the Taiwan Area establishing a branch or involving in investment activities in the Mainland Area shall apply for permission, and the applicability of the old clause subjecting referred investment matters to the provisions of Article 35 of the Act will be excluded. The proposed Paragraph 3 stipulates that the regulations governing the establishment of overseas branches (excluding Hong Kong or Macao) or involvement in investment activities by financial, insurance, securities and futures institutions shall apply mutatis mutandis to the stipulations governing the establishment of a branch or involvement in investment activities in the Mainland Area. Furthermore, old Paragraph 4, which reads, "If necessary, the Ministry of Finance may restrict or prohibit the direct business dealing prescribed in Paragraph 1 to maintain the stability of the financial market after reporting to the Executive Yuan for approval," will be deleted.

2. The proposed Paragraph 2, Article 36 of the Act contains stipulations aimed at excluding the applicability of the provisions of Article 35. This will undermine the operation of administrative systems and therefore is not appropriate:

(1) Article 35 of the Act stipulates that the Ministry of Economic Affairs (MOEA) shall be the single window in charge of handling, reviewing and approving China-bound investment cases. This requirement is designed to make an overall plan to manage outbound investments and to facilitate the investment application process for enterprises. There is no conflict between the provisions in Article 35 of the Act and the proposed provisions in Article 36 that empower the agency responsible for managing the financial industry to conduct specialized reviews on cases involving financial services.

(2) The above-stated system has been implemented for many years without any difficulties. Moreover, the responsible authority allowed domestic insurance and security institutions to establish subsidiaries in China or to become shareholders of Chinese enterprises in August 2002 and February 2005, respectively. Since that time, Taiwan has approved six insurers to establish subsidiaries or hold shares of Chinese enterprises; however, China has only approved one case. The cases involving securities institutions have been obstructed by Chinese regulations requiring that the securities supervisory agencies across the Taiwan Strait sign a memorandum of understanding (MOU).

(3) The main reason that Taiwan does not presently allow its banks to establish branches in China is that both sides have not yet signed an MOU on financial supervision and management, making it difficult for the authorities responsible for the financial industry to agree on a policy for lifting restrictions. Consequently, the agency responsible for reviewing investment cases respects the authority of the responsible agencies for the financial industry. As such, the establishment of China branches by Taiwanese banks is still listed under the category of restricted investment items as stipulated in Article 35 of the Act. Article 35 is not the reason why domestic financial institutions are unable to invest in China.

(4) In sum, if Article 36 of the Act were revised so that financial service providers planning to invest in China are required only to apply for permission from the authority responsible for the target industry, in this case the Financial Supervisory Commission (FSC), it would not resolve the difficulties to be encountered in implementing the relaxation policy. On the contrary, it would destroy the current system designed for reviewing China-bound investments through the single window and the division of labor among government agencies, cause confusion over the handling of investment cases, and create inconvenience for investors. The proposed revisions will possibly result in deep and broad side-effects.

3. With regard to the contents of the proposed Paragraph 3 of the draft amendment which read, “. . . the regulations governing the establishment of overseas branches (excluding Hong Kong or Macao) or involvement in investment activities by financial, insurance, securities and futures institutions shall apply mutatis mutandis,” such contents will make it difficult to control cross-strait financial risk and result in the total collapse of the cross-strait financial management system that has already been established for many years:

(1) China has incomplete accounting and financial reporting systems and is seriously deficient in information transparency, making it difficult to control business operational risk. Once domestic financial institutions are able to establish branches in China by the mutatis mutandis application of the regulations governing the establishment of overseas branches by financial institutions, Taiwan’s financial supervisory agencies will have difficulty in conducting substantive supervision of the branches established in China by Taiwan’s financial institutions. This is due to the failure of both sides to sign a financial supervision agreement to ensure effective supervision and management. Under such circumstances, it is likely that there will be a sharp rise in financial risk. In particular, since banking affairs involve the safety of the deposits of the general public in Taiwan, if a Taiwanese bank’s China branch is poorly operated, the creditor’s rights involved could impact the rights and interests of the parent bank and its depositors and have an extremely negative impact on the domestic financial system.

(2) The authorities granted by stipulations in the first two paragraphs of old Article 36 cover not only the establishment of branches in China, but also the business transactions between financial, insurance, securities and futures institutions across the Strait. The draft amendment to Article 36 will completely change the authorities granted by the original stipulations. Not only the establishment of branches in China will be entirely subject to the regulations governing the establishment of overseas branches, but also the current business transactions between financial, insurance, securities and futures institutions across the Strait will be entirely based on the regulations governing such transactions with other countries. Once the revised stipulations come into force, the long-established mechanism of cross-strait financial management will collapse completely and Taiwan’s cross-strait financial policy promoted in accordance with a sequential and orderly approach will come to naught. It is difficult to assess the possible harm to be caused to economic and financial stability and the national interests of Taiwan.

● Comparison between the Current Version and the Draft Amendment to Article 36 of the “Act Governing Relations between Peoples of the Taiwan Area and the Mainland Area Taiwan”

2006