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Is China The Engine For Growth In The Investment Banking Sector Globally ?

|About: Bank of China Limited (BACHF), IDCBF, CEBCF
Summary

Chinese state-controlled banks emerged from their isolation.

Since the 12th Five-Year Plan (2011-2015), the Chinese economy and the Chinese banks are undergoing a huge transformation.

Accompanying domestic investors abroad has become a primary task for Chinese banks.

Chinese bank’s expansion in the Belt and Road Initiative.

In the 2000s, The Chinese banks expansion had accompanied the country’s economic development. They take off in the wake of China's integration into the World Trade Organization in November 2001; these banks had accompanied the main public group’s expansion and played a main role in the internationalisation of the yuan, seeking approval from the Chinese authorities to become a RMB clearing agent for a given geographical area.

It was not until the early 2010s that the "big four" Chinese state-controlled banks emerged from their isolation. The first one was the historic Bank of China, joined by ICBC - which in just a few years had become the world's largest bank by size and results - and then in 2015 by China Construction Bank and Agricultural Bank of China. Among the most recent arrivals, Bank of Communications, or last year of China Everbright Bank.

In the recent years, their international action seems more focused on emerging countries than on the old developed ones, particularly with the aim of supporting the project of “one road, one belt” developed by Beijing. Many experts highlight the growing role of "emerging banks" in financing the global economy. This development is mainly due to the rapid development of financial flows between emerging countries.

National Context of Chinese banks global expansion

It is amazing to see the growth and development of China since it opened up 40 years ago. These four decades of spectacular growth started with a multi-dimensional process that includes the continued economic integration of Asia, the growth of trade with other major emerging countries and the globalisation of Chinese enterprises and banks.

Facing the permanent weakening of the developed countries, Chinese government made the strategic decision in July 2010 to introduce convertibility for non-residents by making Hong Kong the dominant financial centre for the internationalisation of the yuan.

Since the 12th Five-Year Plan (2011-2015), the Chinese economy and the Chinese banks are undergoing a huge transformation. Government control of Chinese foreign investment has gradually eased. The context is favourable: the Chinese State's foreign exchange reserves increased in 2017 and the RMB (yuan or renminbi) revalued.

In this context, could we say that China becomes the engine for growth in the Investment banking sector globally?

History of Chinese bank’s expansion

Initially, the transformation of Chinese banks has gone through the consolidation of assets, the contribution of capital from the State and strategic investors and the entry of several of them on the stock market. The creation of the CBRC has confirmed the intention to build a controlled banking system and promote the adoption of international standards.

The assets and profits of Chinese banks are rising sharply. But their presence in international rankings is more about China's size and domestic growth than about real internationalisation. The strategic model of Chinese banks is focused on domestic growth and financing the domestic economy.

However, relatively less unaffected by the recent crisis, Chinese companies and banks are now tempted by a greater internationalisation. With the increase in overseas investment, Chinese banks must turn to the creation of a global network. In addition, a Chinese financial strategy is being implemented to give an international dimension to its currency, develop its financial market and boost its banking system.

Motives to internationalisation

Accompanying domestic investors abroad has become a primary task for Chinese banks, as well as managing the country's international financial interests. Therefore, creating a global network that meets this expectation is also important for these banks. Three strategies may be appropriate.

The first strategy is organic growth, which is only the extension of the existing structure by the network mesh. This strategy is suitable for banks that already have operations abroad and in mature markets. The problem with this strategy is that the creation cycle is long and consumes a lot of time for penetration in the markets in question.

The second strategy is the independent external growth of the existing infrastructure. This mode of operation is tempted by the banks that are newly present on the international scene and that are looking for faster development. For example, in recent years, some Chinese banks have begun acquiring medium and small-sized local banks in Hong Kong, Macao, Singapore, Indonesia and South Africa.

These acquisitions were made in a long-term perspective in order to facilitate a more efficient familiarisation of Chinese banks with the environment and to immediately valorise the portfolio of customers on the spot.

Chinese banks are following their corporate and retail clients by expanding abroad, bucking a global banking industry trend of retrenching.

Chinese bank’s expansion in the Belt and Road Initiative

To provide better support for the national initiative « one road, one belt », Chinese banks have been continuously adding more branches in countries and regions involved in the BRI.

For example, Bank Of China (BOC) has expanded its branch in Hong Kong to upgrade it from a city bank to a regional bank.

At present, the BOC HK branch, together with BOC branches in countries of the Association of Southeast Asian Nations, is offering better financial services for the construction of BRI-involved projects in Southeast Asia.

BOC branches in Malaysia and Hungary have made great contributions to the initiative by offering liquidation services for BRI projects in their respective regions.

The group company has also actively attracted overseas companies to use RMB to expand the global influence of the currency while providing loans to BRI projects.

The bank has also taken part in a research project of the central bank of China to map out rules supervising the use of currency among BRI countries and regions.

Chinese banks in emerging countries

For emerging countries, China represents an alternative source of financing, intellectual capital, skills and know-how. These have the ability to transform those countries, setting it on a growth trajectory that will eradicate poverty by equipping African economies for effective and competitive global trade.

For Chinese banks, emerging countries present huge opportunities – from industrial expansion to renminbi internationalisation.

For example, China has expanded its investments in African countries to support their economic growth and development and has become its principal cooperation partner in trade, investment, infrastructural development and economic cooperation.

In this context, it is important to wonder about the future of the internationalisation of Chinese banks in Africa.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.