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China - The World's Emerging Financial Superpower

 March 13, 2013 05:51 PM


The US magazine Worth published a report with its analysis of who were the 100 most powerful people in global finance. Four were from China - Shang Fulin, Chair of China Banking Regulatory Commission; Zhou Xiaochuan, Governor of the People's Bank of China; Lou Jiwei, Chair and CEO of China Investment Corporation and Jiang Jianqing, Chair of the Industrial and Commercial Bank of China (ICBC). They were respectively ranked 14th, 15th, 27th and 31st.

That only four of China's top financial figures were included in the list in fact showed how much understanding of the power of China's financial and banking system still lags behind its reality. There are exceptions – for example Bloomberg journalists Henry Sanderson and Michael Forsythe in their recent book China's Superbank simply stated that Chen Yuan, chair of China Development Bank, was ‘the world's most powerful banker.' But in banking it would seem Deng Xiaoping's famous advice that China should ‘hide brilliance, cherish obscurity' is alive and well.

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This is a serious error, as will rapidly become apparent. To grasp the underlying dynamic of the global financial industry it should be grasped that it is a mistake to understand the strength of China's economy by statistics such as that China produces as much steel as the next 38 countries combined, more cement than the rest of the world put together, that it is the world's largest market for TVs, refrigerators, mobile phones, cars, or that it has more than twice as many internet users as the US. These figures are impressive but far from illustrating the real core of China's economic power. The real center of China's economic strength, which determines both its domestic and global expansion, is unparalleled financial strength.

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China has yet to overtake the US in GDP but the annual sum of China's finance available for global or domestic investment, that is its savings, are already twice those of the US. As Figure 1 shows China's savings in 2011, the last year for which there are comprehensive figures, were $3.6 trillion compared to $1.8 trillion in the US.

Figure 1

13 03 10 China and US Saving

But savings are the ‘raw material' of the financial system. It is this huge flow passing through China's banking system which is making China the world's ‘financial superpower'. China's $3.3 trillion foreign exchange reserves, easily the world's largest, are a powerful adjunct but it is the year after year generation of domestic finance on a scale which has no international parallel which is the unmatched core of China's economic strength.

To see the dynamic this is creating in the global finance industry it is useful to give a comparison of the main indices for China's and the US's banks – 2013's figures, when they are published, will further reinforce these trends.

US banks reporting in 2012 were still ahead of China's on revenue - $550 billion compared to $404 billion, and on assets - $10,079 billion compared to $9,895 billion. But on profits China's banks had already overtaken their US competitors - $105 billion compared to $68 billion. China's banks also held the lead in stock market valuation - $992 billion to $847 billion.

At the beginning of 2013, by market capitalization both China (ICBC, China Construction Bank, Agricultural Bank of China, Bank of China), and the US (Wells Fargo, J.P. Morgan Chase, Citigroup, Bank of America) had four out of the world's top ten banks by market capitalization. But the total valuation of the Chinese banks was $706 billion compared to the US $620 billion. China's ICBC is the world's largest bank by both profit and capitalization.

In other financial fields - insurance, mortgage lenders, credit cards etc - the US still maintains a lead over China. But in core banking strength there is already essentially no difference between China and the US.

But by every indicator the rate of growth of China's banks is many times higher than US competitors. By revenue China's banks were 16% as large as US banks in 2007, by 2012 they were 74% as large. By assets the corresponding figures were 30% and 98%, by market valuation 43% and 117%, and by profit 17% and 155%. China's far more rapid buildup of domestic finance means that the balance will progressively and rapidly move in favor of its institutions. It is therefore only a short period of time before China's overtake US banks on all measures. China's underlying financial strength is relatively rapidly being transformed into institutional strength in its banking system.

Where US banks traditionally held a strong lead over China is that China's were essentially domestic banks but US banks operated globally. This, however, is beginning to change as China's banks ‘go global'.

First to globalize were China's official development banks. In 2005-2011 China Development Bank and Export-Import Bank of China (Exim Bank) provided over $75bn in loan commitments to Latin America. In 2010 their $37bn commitment was more than the World Bank, Inter-American Development Bank and United States Export-Import Bank combined. In Africa China's Exim Bank has lent more than the World Bank every year since 2005 – its loans in 2011 being $15 billion.

But now globalization of China's commercial banks is proceeding rapidly. By the beginning of 2013 ICBC operated in 39 countries with overseas assets of $170bn – a 30% increase on 2011. The stability, and state guarantee, of China's banks, is attractive compared to the continual structurally determined scandals in US and European competitors - making it clear it is the time taken to develop the necessary management skills that is now the primary difficulty in expanding China's banks overseas operations. In such a vital international financial center as the Middle East, the focus of global oil money, the rate of expansion of ICBC's assets in 2012 was 29% to $4 billion while profits rose by 69%.

China's banks have so far concentrated on developing countries, which are growing more rapidly than developed ones. Key acquisitions, for example, were ICBCs purchase of a 20% stake in Standard Bank, South Africa and Africa's largest bank. The advantage of the combination of Standard Bank's local knowledge throughout Africa, and ICBC's huge financial firepower, is evident. ICBC's shareholding in South Africa Standard Bank also made it easy to purchase Standard Bank's Argentinian subsidiary – consolidating ICBC's position in Latin America.

This initial concentration on developing economies resembles the ‘countryside surrounds the cities' strategy of China's telecoms giant Huawei and other Chinese industrial companies. But China's banks financial strength gives them the opportunity to directly expand operations in developed economies. Bank of China and ICBC are now active in New York's property market, while last year ICBC carried out China's first takeover of a US bank with Bank of East Asia. The international expansion of RMB operations, with the world's largest foreign exchange dealing center London trying to compete as an offshore operator with Hong Kong and Singapore, centrally involves China's banks.

Globalization of China's banks cannot be instantaneous. But the problems involved are time in acquiring permits, training management, creating infrastructure etc not fundamental financial strength. Overcoming these difficulties, given the unparalled financial muscle that can be applied, is simply a matter of time.

How should the situation be summarized? It is sometimes assumed manufacturing is China's strongest industry. This is a mistake. China is the world's largest manufacturer, and largest manufacturing exporter. But a substantial part of China's manufacturing output, and half its exports, are still by foreign companies. It will take significant time to build the power of China's own manufacturing companies. But the foundations of China's own banks are already those of an emerging financial superpower. It is only a matter of time, a rather short one, before that translates itself into an equivalent strength of China's global finance companies.

Within a decade a list of the 100 most influential people in world finance will not contain four from China. It is likely to be dominated by figures from China.

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