By Faith Hung and Shu Zhang

TAIPEI/BEIJING (Reuters) - CTBC Financial Holdings <2891.TW>, parent of Taiwan's top credit card issuer, and Chinese state-backed lender China CITIC Bank Corp <601998.SS> have canceled investments in each other amid fresh cross-strait political tensions.

It is the first deal collapse since pro-independence Democratic Progressive Party (DPP) leader Tsai Ing-wen became president of Taiwan in May, but China CITIC Bank's president said there was no political aspect to the decision.

"There is not a single political element to it. We are a commercial bank. We can’t play a leading role in politics," Sun Deshun told a press conference in Beijing.

"This was mainly due to financial regulatory policies in the two locations. And we couldn't reach agreement on some commercial terms."

CTBC and China CITIC Bank said in a statement that both parties had agreed to terminate the deal as it had been more than a year since they signed the contract.

Taiwan's Financial Supervisory Commission Vice Chairman Kuei Hsien-nung said CTBC did not submit applications for the deal as China CITIC Bank had failed to meet a key regulatory requirement.

The requirement is that Chinese banks which invest in Taiwanese banks must have branches in OECD countries for more than five years, he said.

CTBC did not immediately respond to requests for comment.

China regards Taiwan as a wayward province and stopped a communication mechanism with the island in June, suspecting Tsai will push for formal independence.

The communication mechanism was introduced following an improvement of ties under Taiwan's then-president Ma Ying-jeou, who took office in 2008 and signed a series of trade and tourism deals with China.

"The overall environment is not good. These two firms are politically aware ... They knew the deals would not gain regulatory approval given the current political climate," said a PricewaterhouseCoopers executive, who declined to be identified due to the sensitivity of the matter.

DPP lawmaker Lo Chih-cheng disagreed.

"I don't think it's connected to politics. It would be far-fetched to link this to cross-strait relations," he said.

In May 2015, CTBC agreed to pay T$11.67 billion ($368.63 million) for the 100 percent stake in China CITIC Bank Corp subsidiary CITIC Bank International (China) Ltd.

In exchange, China CITIC Bank Corp would buy a 3.8 percent stake in CTBC. No price was disclosed..

China's Industrial and Commercial Bank of China <601398.SS> and Taiwan's Sinopac Financial Holdings <2890.TW> in September last year said they would let a $600 million investment deal lapse because curbs against mainland Chinese investment in the sector had not been relaxed as hoped.

Earlier this month, CTBC said its subsidiary, CTBC Bank, had canceled a deal to buy a 51 percent stake in the Malaysian branch of Royal Bank of Scotland.

(Additional reporting J.R. Wu, Jeanny Kao and Emily Chan in TAIPEI; Editing by Stephen Coates)