Chinese banks
More important players: locally and internationally
By Charles Morgan
It is hard to discuss the global financial system without drawing attention to the role of China in it, especially recently. Its key players in the system, the financial intermediaries – or Chinese banks – are the largest in the world by size of assets, according to an estimate by China Banking Association. The size of Chinese banks' total assets reached 276 trillion yuan ($40.1 trillion) in the first quarter of 2019, achieving a growth of 7.7% year-on-year. When it comes to US treasury holdings, China has been the biggest holder of US treasuries until June this year, when Japan surpassed it. This shows the power of the banking sector to offer credit and shows that China does have leverage in the trade war with the US. All in all, the Chinese banking sector cannot be ignored.
The biggest Banks in the world are Chinese
Out of the top ten banks in the world, the first four are Chinese. The first slot goes to the Industrial & Commercial Bank of China, which is the largest bank in the world when measured by assets. It has $3.62 trillion in total assets. Its activities are mostly commercial. Its revenues come in at $134.8 billion, which places it as the fourth largest bank in the world in terms of revenue. The second slot goes to China Construction Bank Corp. It has assets of $2.94 trillion, and its core offering revolves around corporate banking services. The third slot goes to the Agricultural Bank of China, which is among the top ten companies in the world. It caters its offerings to small farmers and large agricultural wholesale companies, as well as non-agricultural companies. It has assets of $2.82 trillion. The fourth slot goes to the Bank of China, which offers investment banking, insurance, and investing services, and has total assets of $2.63 trillion.
Engines of growth
The cheer size of those banks, among other Chinese banks, makes them pivotal to the Chinese economy. They are a tool that the government relies on to stimulate growth. Recently, the banks have been the actors that helped implement the government’s plan of injecting $126 billion into the economy. Additionally, the People’s Bank of China said it would cut reserve requirements ratio. While the move comes with its own risks, such as credit default risk, the percentage of bad loans that the banks hold remains low around 2%. The benefits of such move are likely to exceed the potential downward effects.
Powering the Chinese growth miracle
Back in the early 1980s, the Chinese government allowed the banking sector to expand, by allowing many state-owned banks to accept deposits from the public and carry out regular banking operations. In the period before that, the People’s Bank of China was the only authorized bank in the country to conduct banking operations. Those banks are the ones mentioned in the previous list, in addition to the Bank of Communications (BoCom), which dates back to 1908. Its stock is publicly traded.
Later on, other specialized banks were established, and they all had policy making roles. The banks are the Agricultural Development Bank of China (ADBC), the China Development Bank (CDB) and the Export-Import Bank of China. All of those specialized banks were a cornerstone in the superior Chinese economic growth that followed the 1980s, as they were together key nodes in the Chinese financial system that was gaining more and more in efficiency in lending and borrowing. The measures taken proved successful.
Green finance as a competitive edge
Not only that, but the banks also contributed significantly to green finance. By adopting a green finance policy, the banks maintained their resilience in the face of a tough competitive market. The banks maintained their “social license to operate” by offering loans to financial products and services towards environmentally responsible and low carbon technologies, projects, and companies.
Increasing role in the belt and road initiative
Moreover, the Chinese banks are currently playing a key role in the implementation of the Belt and Road initiative. They offer lending facilities to midsize and large enterprises, among other measures.
By the end of 2016, nine Chinese banks had established 62 primary affiliates in 26 countries participating in the Belt and Road Initiative. These include 18 subsidiaries, 35 branches, and nine representative offices, according to Pan Guangwei, deputy director of China Banking Association.
Conclusion
The rise of the Chinese banking sector and the Chinese financial institutions at large signifies a shift in power in the global financial infrastructure and architecture. They represent a challenge to the system that was produced by the Bretton Woods agreement. The western financial system is no longer the only player, and in the future, this may pave the way for a multilateral global financial system.
The clout of the Chinese banks is growing. Locally, they are acting as engines of growth. Their proper risk management procedures are enabling them to maintain stability in their operations and the economy. This is despite the storms of the trade war. We are seeing increasing reliance on them by the government. Internationally, Chinese banks are among the largest. Any decision by them to change their asset holdings will have an impact on global financial markets. Cooperation between Chinese banks and other financial institutions on one hand, and financial institutions in Asia on the other, can pave the way for the development of a truly multilateral global financial system. Such system would benefit all countries and reduce the power of sanctions imposed by Western powers. The timeline for this development, however, is yet to be explored.
