Herbert Poenisch, Member of IMI International Committee and former Senior Economist BIS.

Chinese owned banks have become not only the largest banks in the world but also major players on the global financial stage. In the first phase they followed Chinese enterprises as they expanded their global operations following the «going out» strategy starting in the early 2000s. In this role they followed in the footsteps of other international banks, such as US and European banks earlier on. At that stage funding of overseas operations was mainly from the head office. In the meantime they have moved on to become truely global banks, funded by international financial markets and local deposits in their branches.

Although we do not have the precise statistics on their global operations, approximations provided by the central banks in countries where they operate in allows the BIS to produce a comprehensive picture of their global operations. Through the nationality breakdown of their local banking statistics (LBS), the footprints of Chinese banks in close to 50 financial centres, such as Hong Kong, Singapore, London, Luxemburg are captured. Thus LBS capture about 93% of global banking activities. These data, in addition to the ones provided by China since the end 2015 allow us to draw conclusions about the importance of Chinese banks` global business.

As China does not publish data compatible with the Consolidated Banking Statistics (CBS) of the BIS we have to use counterparty data to obtain a picture of global activities of Chinese banks.

This article will cover the major Chinese participating banks, their cross border lending and borrowing, compared with the cross border business from China. It will also cover the ranking of Chinese banks among the global banks according to the Bank Internationalisation Index. Finally, the main differences between the globalisation strategy of Western and Japanese banks and Chinese banks will be spelt out.

1. Chinese banks global business

The Chinese banking system is the biggest in the world with estimated assets of RMB 336tr in mid 2021. This translates into USD 53tr or 350% of GDP. In comparison, the US banking system amounted to USD 19tr or 100% of GDP at the same time. The difference is mostly explained by the comparative importance of financial markets in financial intermediation in the USA. However, the Chinese banking system is basically a domestic system whereas the US system has a sizable share of cross border business.

The US cross border claims were USD 4.35tr, or 22.8% of total assets. Chinese banks cross border claims amounted to USD 2.658 or 4.7% of total assets.

Out of all Chinese banks we need to define who qualifies as a Chinese global bank. According to the Bank Internationalisation Index (BII) of the Academy for Internet Finance (AIF) in Hangzhou the global Chinese banks are first and foremost the Bank of China (BOC), the Industrial and Commercial Bank of China (ICBC), the Construction Bank of China (CCB), and to a lesser extent the Agricultural Bank of China (ABC) , China International Trust (CITIC) and second tier banks such as GuangDa, Jiaotong, Mingsheng, Pufa, Xingye, Chaoshang, The Financial Stability Board (FSB) rating of Global Systemically Important Banks (G-SIB) also features the major four Chinese banks. Regarding cross border business, two of the three policy banks, the China Development Bank (CDB) and the Export Import Bank of China (ExImbank) are major players which are included in the LBS. The major banks, BOC and ICBC each have more than 500 overseas affiliates. The CDB and ExImbank have only few branches, notably in Hong Kong and a small number of representative offices.

According to the Bank Internationalisation Index of 150 globally active international banks of the Hangzhou AIF, only foreign banks feature among the top 20 with the likes of Standard Chartered (61.7), Banco Santander (55.8), Credit Suisse (52.8), HSBC (50.8), Deutsche Bank (45.6), Citigroup (39.7), Mitsubishi UFJ (33.6). Chinese banks feature only after this, with BOC in position 21 (26.9), and ICBC (17.1). Other Chinese banks fall lower into single digit indices. This is explained by the relative importance of domestic business for Chinese banks. In addition to the global top 50 banks, AIF publishes rankings for G-SIB, Belt and Road countries and RCEP.

All of these banks report their cross border business in their annual reports, comprising loans and securities on the asset side as well as deposits and securities issued on the liabilities side. It is uncertain to what extent activities of their affiliates abroad are included in their annual reports.

Banks resident in China, mostly Chinese owned had cross border assets of USD 1.541 tr in mid 2021. Cross border liabilities amounted to USD 1.648 tr. This was the traditional picture with liabilities exceeding assets, as banks in China borrowed internationally to fund domestic as well as foreign operations. Looking at the nationality of Chinese owned banks, their global cross border assets amount to USD 2.658 tr and their liabilities to USD 2.509 tr. Assuming that most of the cross border asset from China are accounted for by Chinese owned banks, the difference of USD 1.1tr must be accounted for by lending from overseas affiliates of Chinese banks.

A big portion comes from lending by Chinese banks in Hong Kong, where the total cross border lending was USD 1.705tr in mid 2021 with Hong Kong owned banks providing only less than USD 100bn. The rest stems from foreign banks, first and foremost Chinese banks.

Regarding the currency breakdown, the major part of 60% of the cross border lending of Chinese owned banks was in USD, whereas USD liabilities made up less than half. RMB deposits made up about 30%, mostly in their branches in Hong Kong. This points to a currency mismatch similar to European and Japanese banks, as USD lending exceeds USD funding. This source of funding has come under increased stress during Covid19 and might resurface as result of recent tapering.

Whereas most other international banks conduct business with clients in advanced economies, Chinese banks mostly deal with emerging market developing countries (EMDC). In mid 2021 Chinese banks had claims on 133 EMDC out of a total of 143, with a market share of 22.6%. This difference is due to two reasons. Firstly, China is the major trading partner of some 63 countries among the EMDC group and secondly, Chinese banks provide the financial side of state led initiatives such as the Belt and Road Strategy. In addition, the two policy banks, the CDB and the ExImbank play a major role in financing Belt and Road projects, either to foreign partners or domestically to Chinese companies.

2. Different role of cross border lending

Whereas non Chinese global banks, such as US, European and Japanese are basically privately owned, main Chinese banks are state owned. They are pursuing different aims in their cross border business. Private banks are driven only by commercial motivations, wheras state banks are also pursuing non commercial aims such as state led initiatives and geopolitical considerations. Serving the BRI is such a case in point.

Auditors of non Chinese banks check the performance of their clients on whether the cross border business adds to the financial performance of the banks. This was the criteria for many European banks to rethink their business model after the Global Financial crisis, ie a retrenchment from overseas operations.

In the case of China this is not the case although we are assured that in the case of the policy banks they have to produce profits, subsidies can be provided through different channels. A study on the ODF finance provided by the two policy banks argues that Chinese cross border finance is different.

The nature of Chinas ODF is a mixture of official aid and export credits. In terms of lending destinations, these credits are aid-like and flow mostly to the EMDC, but in terms of their terms and conditions they appear commercial, ie in most cases the loans are non-concessional and surprisingly costly. There are two rationals behind Chinas ODF: pursuing the states political and foreign policy objectives and facilitating firms international competition. In this model, the state participates in project financing, such as infrastructure not through direct allocation of fiscal revenue but through enhancing the creditworthiness of projects and making them financially viable to the market. This «state-supported, market based» means of development finance explains the relative costliness of the Chinese ODF. Chinese financiers have been cautious in discussing their operations in public, the real lending rationales behind the Chinese credits remain opaque.

Official Development Finance (ODF) includes different kinds of credits. In many cases it refers to official aid, ie grants and concessional loans that support the development of recipient countries. It also includes export credits that aim to facilitate exports of lending countries firms. These two hold fundamentally different lending incentives: aid is charitable, whereas export and project credits are commercially driven. In contrast the OECD definition of Overseas Development Assistance (ODA) only includes grants and concessional loans. There is also an agreement on what constitutes a concessional loan under the export credit agreement (ECA). Non-concessional loans and export credits in the interest of the donor do not qualify as ODA but rather Other Official Flows (OOF).

Chinese ODF generally falls into four categories: grant and interest free loans disbursed and funded by the government, concessional loans partly funded by the government and disbursed by policy banks, non subsidised loans disbursed and funded by policy banks, commercial bank loans insured by an official insurance company.

A similar state driven-market based logic can be applied to cross-border lending by the major state owned Chinese commercial banks to EMDC. They serve a multiple purpose, they serve state supported strategies such as the BRI as well as support Chinese enterprises in exports and overseas projects. They form part of the Chinese outward financial flows, including increase in direct investment assets and increase in other investment in the balance of payments, but excluding outward portfolio investments. These two components increased markedly in the past few years to reach USD 4tr in 2020. Increase in outward direct investment of USD 1tr and other investment of USD 3tr cover both, financing in AE as well as EMDC. Filtering out financial flows into EMDC, let alone ODF is very difficult. Official data, such as balance of payments data or annual reports of banks on the ODF is unavailable, as they normally publish only aggregate data and limited data by sector, region or project.

Whatever the commercial viability of Chinese banks` foreign activities, several risks remain and need to be managed. Overseas activities are subject to enhanced market risk as multiple currencies are involved and credit risk is ever present in EMDC, such as Venezula in Latin America, Sudan in Africa and Pakistan in Asia. Among market risk, exchange rate risk features prominently as the RMB has recently been subject to appreciation. Banks could be caught in the undesirable situation when most of their assets are in a weak currency, such as the USD and most of their liabilities are in a strong currency such as the RMB. Regading credit risk, EMDC have been exposed to increased risks due to the outfall of the Covid pandemic and downturn in the global economy. Will China Inc, rather than the Chinese banks absorb this enhanced risk or will the international community, such as the IMF have to step in?

Conclusion

Chinese banks have expanded their foreign activity in recent years, mostly dealing with EMDC. They have implemented the Chinese approach called «state led-market based». This has been well received in recipient countries but is facing increased risks. These are market risks such as appreciating RMB and credit risk such as EMDC clients adversely affected by the outfall of the global pandemic. Further strain could be added if global interest rates rise and a resumption of capital repatriation to AE resumes tapering. Market driven international capital flows might not follow the underlying Chinese approach. Finally, will Chinese banks be able to meet the stricter FSB regulatory and supervisory requirements for global systemically important banks?

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