By Zhang Liping

Research Report Vol.18 No.1, 2016

I. Overview of the “Go Global” Move of China’s Financial Sector During the 12th Five-Year Plan Period

1. Breakthroughs in the “Go Global” move in China’s financial sector

During the 12th Five-Year Plan period, the volume of outward foreign investment by Chinese financial institutions has risen from $70.438 billion in 2011 to $134.553 billion in 2014, up by 91% (see Table 1).

Recent years saw rapid overseas expansion of China’s banking sector. By the end of 2014, a total of 20 Chinese banking financial institutions have opened more than 1,200 branches overseas, covering 53 countries and regions in the world. Besides, they have improved the profitability of their overseas business. In 2014, China’s five state-owned commercial banks, including Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, China Construction Bank, Bank of Communications (hereinafter referred to as “Five Banks”), enjoyed 8.65 trillion yuan of overseas assets, 172.4 billion yuan of revenue and 92.9 billion yuan of profit before tax, contributing 8.7%, 7.2% and 7.7% respectively to their groups, 0.5%, 1.0% and 1.6% respectively higher than in 2013 (see Table 2).

China’s banking sector accelerates it participation in financing international projects. By the end of the second quarter in 2015, China’s balance of syndicated loans has reached 5.37 trillion yuan, an increase of 519.1 billion yuan, i.e. 11% compared with the previous year. Furthermore, in the first half of 2015, there were 718 syndicated loans, with a year-on-year increase of 45. In terms of mergers and acquisitions, Chinese financial institutions backed a number of major overseas acquisitions. For example, Industrial and Commercial Bank of China supported China National Offshore Oil Corporation in its takeover of Nexen, China Three Gorges Corporation in the takeover of Energias de Portugal (EDP), and China Minmetals Corporation in the takeover of Peru copper mine. In addition, granting a loan of 100 million euros, Bank of China played the leading role in helping China Bright Food Group acquire 76.7% stake in Tnuva, the largest food company in Israel.

China’s insurance sector makes large strides in its investment overseas. Statistics show, as of the end of 2014, overseas investment of China’s insurance funds reached $24 billion (about 146.58 billion yuan), 1.44% of the total assets of the insurance industry, up by 147% compared with the end of 2012.

Moreover, many security traders have expanded overseas. In addition to Hong Kong of China, they have gradually expanded business in Japan, Singapore and Europe.

Apart from commercial financial institutions, policy-based and development banks play a crucial role in supporting enterprises’ “Go Global” move. China Development Bank (hereinafter referred to as “CDB”) had foreign exchange loans as high as $320 billion by the end of 2014, far more than that of World Bank, making CDB the largest development financing institution throughout the world. As for financing national strategic cooperation projects, CBD, is involved not only in designing the loan structure and returns on interest rate, but also in designing and financing overseas cooperation projects of large state-owned enterprises like China National Petroleum Corporation and SINOPEC, making it an indispensable “financial consultant” to government and enterprises in negotiations. The Export-Import Bank of China, through exports seller’s credit, loans for foreign contracted projects, government concessional loan and preferential export buyers’ credit, and a package of mutually beneficial cooperative loans, has strengthened cooperation with banks, leasing, insurance and trust institutions, supported the export of large complete sets of equipment, and attracted social financing resources with its own. Moreover, China Export & Credit Insurance Corporation hits the record of the amount covered by medium- and long-term export credit insurance and by overseas investment insurance, which effectively supports the “Go Global” strategy of Chinese enterprises.

2. Reasons for the accelerated pace in implementing the “Go Global” strategy by Chinese financial institutions

First of all, enhanced strength of financial institutions is the precondition for venturing abroad. According to The Banker, a British magazine, in 2010, 84 Chinese banks were among the world’s top 1000, with Industrial and Commercial Bank of China ranking the 7th in capital; in 2015, 117 Chinese banks were on the top 1000 list, with Industrial and Commercial Bank of China, China Construction Bank, Bank of China, and Agricultural Bank of China ranking the 1st, 2nd, 4th, and 6th respectively in capital.

Second, the enterprises’ acceleration of going global inspires financial institutions to follow suit. Study shows that China’s financial institutions go global in an aim to help their domestic clients expand and compete globally. And such institutions expand their overseas business as a growing number of clients go global and engage in overseas business. For example, China has become the largest source of FDI in Australia. As the first Chinese bank opening a branch in Australia, Bank of China has eight branches, providing comprehensive financial services for not only Chinese companies but local businesses and residents.

Third, national strategies and policies ensure the fast pace of going global of financial institutions. Development and Reform of the Financial Industry During the 12th Five-Year Plan Period, issued in September 2012, points out the importance of improving the systems and regulations related to the “Go Global” strategy of financial institutions, guiding them to adopt effective strategies for developing overseas, to strengthen the reserve of international talents, and to gradually develop large multinational financial institutions in China. Besides, it is vital to encourage financial institutions to expand international business steadily, enhance their operation ability in international market and promote a foreign financial service system conducive to the upgrading of export products and facilitating enterprises to invest in overseas market. All of these are guidelines for China’s financing sector as it goes global.

3. Difficulties and problems for financial institutions in their “Go Global” move Such difficulties and problems exist in the following five aspects.

First, the headquarters of financial institutions attach little importance to their overseas business. With large-scaled and profitable business in a familiar environment with controllable risks at home, the headquarters of financial institutions focus more attention on domestic business than overseas counterpart, and therefore prioritize the former in staffing.

Second, there is a lack of experience of developing business in international market. In the process of globalization, financial institutions should not only possess international financial knowledge, but also adapt to the culture, legal system and financial regulatory system in host countries, all of which needs long-time experience. However, it is not until recent years that China’s financial institutions began to explore international market and had little experience of operating overseas. Unlike large-sized multinational counterparts, China’s financial institutions fail to integrate external financial resources according to the rules of the international financial market.

Third, domestic banking business pattern is different from its overseas counterpart. Foreign banks focus on asset-light transactions, while Chinese banks engage in asset-heavy loans, which can be seen in their overseas business. Chinese financial institutions still concentrates on traditional deposits, loans, and international settlement, without innovative products and services, thus failing to adapt to local financial environment and design new strategies based on local market and clients’ needs. As innovative business products enable Chinese financial institutions to compete with their local counterparts, they should change the fixed business pattern when they venture in the foreign market. ...

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