CHINA’s BANKING system is the largest in the world with assets of $ 35 billion. The four largest lenders, measured by wealth, top the global rankings. Nevertheless, Western banks rarely encounter Chinese colleagues in foreign regions. This has supported the stereotype that China’s banks either have no interest in global business or are uncompetitive overseas because they are staffed by permanent bureaucrats and filled with bad credit. A new study suggests this portrait is far from the mark.
Indeed, the global presence of Chinese banks rivals that of Western lenders. In June of this year, depositors, including some of their policy banks, represented 7% of total cross-border credit flows, up from 5% in 2015, and loaned to 196 out of 216 countries. A recent paper by Catherine Koch and Swapan-Kumar Pradhan of the Bank for International Settlements (BIS) and Eugenio Cerutti of the IMF explains why the rich world has not noticed: China’s banks rule poorer markets, Western lenders either never rule entered or are now giving up.
Chinese banks today grant 26% of all cross-border loans to developing countries, most of them in dollars (see chart). That is more than a fifth in 2016 and has increased since the pandemic. Ms Koch pointed out that the BIS figures only cover countries reporting their reports, suggesting that the real proportion could be even higher. China’s share is still lower than that of European banks, which, although declining, account for 34% of cross-border lending to emerging markets. In half of these countries, banks are now the largest cross-border lenders.
Emerging market banks tend to be reluctant to lend far from home, possibly because their own markets are still growing and the creditworthiness of distant borrowers is harder to gauge. Using loans given by banks from their home base as well as from their overseas subsidiaries, the researchers show that Chinese lenders are not so deterred. In that sense, they are similar to lenders from Europe and America, says Cerutti, although they are typically state-owned and their overseas expansion is much younger.
In other ways, however, China’s banks stand out. Cross-border lending typically correlates with trading volumes, FDI and portfolio flows. All of this helps lenders get more information about foreign borrowers. The link between China’s banks’ lending and their bilateral trade relationships is particularly strong. However, your lending has little or no relation to investment flows. The authors suggest that this reflects China’s capital controls and the fact that its portfolio investments are targeting richer markets.
What does this all mean for borrowers? The rise of Chinese banks brings both risk and reward. In some places, they are so important that if they are withdrawn in shock, a local credit crunch can ensue. But China could also be a source of much-needed capital. With deeper integration into global financial markets, capital controls could gradually be relaxed – and then the floodgates for lending could really open.