Taiwan will lift a ban put in place more than 60 years ago preventing Chinese banks from investing in the island's lenders, officials said on Wednesday.
From January 2, individual Chinese banks can buy up to five percent of the shares in any given Taiwanese bank, while total Chinese shareholdings may go up to 10 percent, the Financial Supervisory Commission said.
The decision removes a prohibition put in place in 1949.
Taiwanese and other foreign banks are already allowed to buy stakes of up to 20 percent in Chinese lenders, while total foreign shareholdings in Chinese banks are capped at 25 percent.
Lee Jih-chu, vice chairwoman of the commission, hinted that Taipei's move may provide the green light for planned transactions to go ahead, telling reporters there had been talks about such a decision. She provided no details.
The commission's announcement helped lift the Taiwan stock market, with banking shares surging 6.66 percent.
Taiwan and China in 2009 signed a package of agreements on better cooperation in banking, insurance and securities.
Currently six Taiwanese banks have branches in China while four others have opened up liaison offices there. Four Chinese banks have set up representative offices in Taipei.
China still considers Taiwan part of its territory, even though the island has governed itself since 1949 at the end of a civil war.
Ties have improved since Ma Ying-jeou became Taiwan's president in 2008 on a China-friendly platform.
