China’s banks are racking up foreign assets, driven by trade flows, and the country’s corporate diaspora. Even at the current slow pace, what today looks like “following the client†could soon become “following everyone’s clients.†(See chart.)
In 2013, China’s lenders abroad mostly stuck with what they knew - servicing Chinese companies. But there were firsts. The Agricultural Bank of China started clearing yuan trades in Britain, and the Industrial and Commercial Bank of China issued a yuan-denominated British bond. Those niche markets can still grow fast; the yuan is now the second most-used trade currency after the dollar.
Takeovers are the logical next step. A dream pairing of ICBC and a London-based emerging market lender, Standard Chartered, may be too complex, despite the latter’s sliding valuation. But majority stakes in markets where Chinese companies trade and invest make more immediate sense. The China Construction Bank set the tone by buying a stake in Brazil’s BicBanco in November. Similar deals may occur in Africa and Eastern Europe. Even oil-rich Iran could be a target in a future sanctions-free world.
The challenge is to avoid the same mistakes Japan made in the 1980s. Fueled by an appreciating currency and a restrictive home regulator, Japanese banks started expanding abroad. By 1988, six of the world’s 10 biggest banks were Japanese, according to The Banker. When bad debts rose at home, the lenders retreated, leaving a credit squeeze in their wake.
China’s saving grace may be its banks’ inexperience and government micromanagement. CCB’s BicBanco deal was two years in the making, and ICBC has been haggling over Standard Bank’s London-based commodities desk for over a year. That limits the scope for impulsive and foolish deals. Capital controls also mean China’s banks can’t easily switch their onshore yuan into dollars or euros, limiting their ability to lend abroad.
Still, China is a land of big numbers. The top five banks’ overseas loans totaled $538 billion by the end of June, double the level of 2010 and close to the size of Ireland’s entire domestic loan book. Even if global banks aren’t yet losing business to China’s mega-lenders, 2014 should see them start to take the prospect seriously.
John Foley is Reuters Breakingviews China Editor. For more independent commentary and analysis, visit breakingviews.com.
