Taiwan's agreement with China on financial regulatory cooperation is set to take effect on Jan. 16, but many extra restrictions crafted by the local financial regulator have left the cooperation void of substance and might jeopardize Taiwan's negotiations with China on an economic cooperation framework agreement. Even before the financial regulatory pact was concluded, Taiwan had already subjected its financial industry to a raft of regulations, in fear of mismanagement. This made the market almost impenetrable by foreign investors. In addition, extra rules were designed exclusively to regulate Chinese investment and investments in China. These rules, which are not required under the World Trade Organization (WTO) framework but are necessary to meet Taiwan's law govering its relations with China, are a complication. For example, local security firms that would be allowed to enter the Chinese market under the financial regulatory cooperation pact were restricted by the Financial Supervisory Commission to investments of no more than a certain percentage of their assets. Also the commission has been capricious about how local banks would be allowed to set up offices in China, even with two days to go before the financial regulatory cooperation pact takes effect. The root of these regulations boils down to the political hostility between the two sides. But as an economy set to replace Japan as the second largest in the world,, China is trying hard to integrate with the global community and there is little chance that it would back down on its agreement with Taiwan in the area of financial cooperation. We therefore call on the Taiwan authorities to follow international practice on the issue, otherwise all the efforts in achieving a financial cooperation pact with China could come undone. Furthermore, the fact that the local financial regulator, in a bid to cater to Chinese banks, has tightened up the rules governing the operation of foreign banks in Taipei means that the progress of financial deregulation could be retarded. Under the WTO framework, showing favor to the financial industry of a member economy would hardly go unchallenged by other members. Taiwan is sure to be disappointed if it is reluctant to give China its due under the WTO framework while at the same time hoping that China would accord it better treatment than required by the WTO. The whole business shows high expectations for the financial cooperation pact with China, but the local regulator's tight restrictions could dash the dream of transforming the island into a regional financial hub. 