Deloitte: Integration, Differentiation Will Shape Economic Outlook of China

In the coming decade, mutual prosperity and economic development in the Chinese Mainland, Hong Kong and Taiwan will be determined by whether a proper balance between regional integration and harmonization, and local differentiation and specialization can be achieved, according to the latest thought leadership paper by the Deloitte China Research and Insight Centre.


At the Asian Financial Forum in Hong Kong last week, Deloitte China hosted a workshop on "Greater China Financial Cooperation" and has tabled a thought leadership paper titled "Creating Value in the Coming Decade – A strategic view of Banking and Financial Sector synergies in Greater China and Beyond" for discussion of issues that are crucial to the optimal development of Greater China and the Asian region.


Over 300 business executives attended the Deloitte Workshop and participated in a polling exercise about the financial cooperation within Greater China. Around 57% of participants believe that financial services companies in the Chinese Mainland, Hong Kong and Taiwan will have developed distinct service roles that serve all of Greater China by 2020, and around 40% of participants perceived that Greater China financial institutions will be peers globally with the world's largest financial service networks. The polling results are in sync with the findings at the Deloitte's thought leadership paper.


"In recent years, the Chinese Mainland, Hong Kong and Taiwan have paid great effort on boosting economic cooperation while maintaining individual specialization, which have contributed to the strong development of Greater China," says Deloitte China CEO Chris Lu. "Going forward, we believe that regulation and market forces will shape the way integration and differentiation is taking place within the region."


Lu says that optimizing both regulatory progress and market activity will contribute to a sustainable recovery and a major role for Greater China in the new global order. He explains that these two forces that interact within Greater China as a whole have created and will continue to generate huge economic values for innovative service enterprises and companies, especially in the financial services sector.


Meanwhile, integration has become a prevalent trend in the financial services sector in the Chinese Mainland, Hong Kong and Taiwan as evidenced by the surge in cross-border mergers and acquisitions (M&A) in the sector within the region, notes Eric Tong, Global Financial Services Industry Leader of Southern Region, Deloitte China. He says that in 2008, the total value of cross-border M&A deals within the financial services industry reached US$10,508 million in the Chinese Mainland, Hong Kong and Taiwan, against US$6,615 million a year earlier.


"In this new environment, the financial services sector in these three markets should capitalize on the increased cross-border dynamics for their regional expansion. For instance, Hong Kong and Taiwan banks may consider focusing on specific investment, merchant or retail banking activities and leveraging their specific expertise to expand into the Chinese Mainland," he notes.


The paper says integration has been achieved through mechanism such as dual-listed stocks, banks from one economy opening branches in another, special agreements providing benefits and privileges for each other and opening of various investment windows across the borders. The increased integration enables the three economies to interact, share mutual strengths and benefit from each other's resources, markets and growth.


Deloitte China Research and Insight Centre Director Dr. Ken DeWoskin says that sustained differentiation of each system is the opposite force which will play a role in shaping the economic prospect within the region. He explains that from a regulatory standpoint, differentiation is maintained through distinct systems of taxation, customs, judiciary, bank regulations, currencies, financial systems and the like. From a market standpoint, differentiation is sustained by consumer taste, behaviour, capacity, and standards of living and scale.


"Different advantages of each region will create synergies and unique opportunities for business cooperation and competition," says DeWoskin.


Commenting on the financial cooperation in Greater China, Deloitte Taiwan CEO Mr. S.C. Huang agrees that special agreements between the Chinese Mainland and Taiwan will play a strong role in shaping the economic outlook of Greater China. He says investment and trade talks continued rapidly throughout 2009. The "Memorandum for Understanding Cross Strait Financial Supervision Cooperation" signed last November also paved the way for the Mainland and Taiwan and to reciprocally approve operations by each other's financial institutions.


"In the near future, it is likely that the Chinese Mainland and Taiwan would also sign the Economic Cooperation Framework Agreement, which will act as a free trade agreement allowing the Mainland and Taiwan to open their financial markets to each other. The agreement will help Taiwan's banking and financial industry develop a strong presence in the Chinese Mainland," comments Huang.


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