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Global ambition unfulfilled

by Ben Shenglin

Global ambition unfulfilled

Since China opened up to the rest of world nearly 40 years ago, Chinese financial institutions have been attempting to explore overseas markets and expand their business abroad. They have had some success, but need to do more before they can be considered truly global institutions.

The Chinese Banks Internationalisation Index, devised by the Academy of Internet Finance, aims to measure the progress of Chinese banks’ internationalisation over time. It reflects criteria including offshore assets, operating results of overseas businesses, banks’ overseas offices and the number of cross-border mergers and acquisitions transactions undertaken.

The index indicates that Bank of China is the most internationalised of China’s Big Five state-owned banks, with an index value 2.5 times the five-bank average for 2007-14. Agricultural Bank of China is accelerating the pace of its internationalisation but still largely falling behind.

As of 2014, CBII values for BOC, ICBC, Bank of Communications, China Construction Bank and Agricultural Bank of China – on a scale of 0 to 100 – were 21, 8.2, 7.1, 4.1 and 2.7 respectively.

China CITIC Bank leads the way among joint-stock banks, and is more internationalised than both China Merchants Bank and Guangdong Development Bank. However, growth has moderated over the past five years, and Guangdong Development Bank is quickly catching up.

At the end of 2014, CBII values for China CITIC Bank, China Merchants Bank and Guangdong Development Bank were 4.4, 2.3 and 1.2 respectively.

Reflecting continuing low levels of internationalisation, contributions from overseas business to Chinese banks’ overall results remain low. For the Big Five banks, the percentages of assets, revenue and net profits generated outside the Chinese mainland between 2007 and 2014 were just 8.1%, 6.1% and 6.3% of the total respectively, significantly behind global banks such as Citibank (60.3%, 50.6%, 50.3%) and HSBC (48.4%, 62.4%, 69.1%).

Overseas business

Chinese banks’ overseas business is growing rapidly. Excluding the impact of the 2008 financial crisis and the Chinese government’s Rmb4tn ($586bn) stimulus package, which generated lending opportunities for onshore businesses, overseas operations have expanded at a much quicker rate over the past eight years. Growth at the Big Five banks has averaged 28.6%.

Almost half of the overseas branches of Big Five banks are in Asia. There are more branches in more developed regions such as Europe and North America than in less developed regions such as Africa, showing that developed markets remain a major focus. Among the Big Five banks, Bank of China and ICBC have the widest international branch network, accounting for almost three-quarters of the total.

Developing global strategies

As they look to expand, Chinese banks will need to be prudent when developing global strategies, which should reflect their own capabilities and business priorities. Simply copying others will be fraught with risk.

They would also benefit from following government policies and strategic priorities more closely, and paying greater attention to financial regulations in different countries. For countries with lower regulatory barriers, establishing local branches and acquiring local banks may represent a possible entry route.

Ben Shenglin is Professor of Banking & Finance, Dean of Academy of Internet Finance, Zhejiang University and Executive Director, International Monetary Institute, Renmin University of China.