The expansion of Chinese enterprises abroad as well as the launch of the Belt and Road Initiative has driven a surge in cross-border lending by China’s banking sector since the start of the decade.
A new report from the Institute of International Finance indicates that the cross-border lending of Chinese banks has increased by 500% since 2010, rising to USD$630 billion by 2017.
The rate of growth in overseas lending by Chinese banks far exceeds that of the banking sectors of other major economies across the same period, with the US seeing an increase of 13%, Japan 35% and the EU 5% since 2010.
This breakneck growth has made China’s banking sector the world’s 8th largest supplier of cross-border loans.
Zhao Qing (赵卿) a senior analyst with Suning Finance, said to Beijing Business Today that a key reason for the surge in overseas lending by Chinese banks was the push for domestic enterprises to “go abroad,” as well as the launch of Xi Jinping’s Belt and Road initiative, which has dramatically expanded China’s provision of financing to participating nations.
As of the end of 2017, 10 Chinese-invested banks had established 68 first-tier entities in 26 Belt and Road countries, including 18 subsidiary banks, 40 branches and 10 representative offices.
In just the past three years Chinese-invested banking-sector institutions have participated in nearly 2700 Belt and Road-related construction projects, extending nearly $400 billion in credit and over $200 billion in loans.
According to Zhao the accelerated internationalisation of the renminbi has also helped Chinese-invested banks to expand abroad, spurring them to establish overseas entities.
Internationalisation of the Chinese currency has increased demand for the renminbi in other countries and the need for renminbi settlement, prompting major banks to accelerate the development of overseas renminbi settlement operations.
China’s three policy banks as well as the big five state-owned banks are at the fore of overseas expansion, while commercial banks making forays abroad include China Merchants Bank, China Citic Bank, Industry Bank Co., and Shanghai Pudong Development Bank.
Industrial and Commercial Bank of China has taken the lead in foreign growth, establishing 419 entities in 45 countries, and establishing correspondent bank relations with 1545 overseas banks in 143 countries.
As of the end of 2017 ICBC’s overseas entities had total assets of $358.597 billion, for a year-on-year increase of $52.147 billion, or 17%, accounting for 9% of the group’s total assets.
According to Wen Biao (温彬), chief researcher with China Minsheng Bank, China’s overseas loans can be divided into two broad categories, the first being financing for Chinese-invested enterprises that are expanding abroad, and the second being finance for local clients, which includes the provision of complementary supply chain or industry chain financing to the customers of Chinese-invested enterprises, as well as financial services to reputable or large-scale local enterprises.
Wen is concerned that the breakneck expansion of Chinese banks abroad could be attended by considerable risk, given their relative inexperience in overseas jurisdictions.
“Overseas lending after all involves other countries where the relevant economic and legal systems are different, while the economic cycles, monetary policy and regulatory policies of each country are all very different from China’s.
“Consequently, with respect to overseas financial products and services and overseas lending, it’s necessary to comply with local regulatory requirements and corresponding legal and regulatory systems, and implement strict compliance assessments, to ensure the security of loans.”