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The Globalization of Chinese banking

With increasing integration into the global economy. There is good reason to believe that the Chinese economy has reached a point where its status as the biggest export country will also soon become the biggest in outbound direct investment.



This new model requires not only Chinese enterprises to expand their global businesses, but also China's banking sector to accelerate its internationalisation. One particularly striking feature of the multipolar world over the past decade has been the rapid appearance of emerging market multinationals, in particular from the BRICS. These multinationals benefited from globalisation, and, in turn, have played increasingly significant roles in driving globalisation.



Global business and its conventions have changed in many ways, capital flows are no longer one way - from developed nations to the developing economies. Now both have become capital exporters. In contrast to the weakening of consumption in advanced countries, there is huge from new consumers emerging in developing markets.



As part of its ‘Go Abroad’ policy the Chinese renminbi has become the second most widely used currency in trade and finance, and ranked fourth in payments, sixth in international inter-bank loans as well as new bond issues, seventh in foreign exchange transactions and eighth in terms of outstanding international bonds. These figures show the main driving force for Chinese banks to follow their customers abroad.



Meanwhile, with the renminbi's ongoing internationalisation, there have been a new choices for Chinese firms and banks to freely choose their settlement and investment currency, making it easier for them to lower the cost of finance and conversion by raising funds from different onshore and offshore renminbi markets. And so it is unimaginable that the renminbi can become a global reserve currency without support from Chinese international banks.



Admittedly, Chinese financial service providers lag well behind other enterprises going abroad. There is room for further improvement in providing enterprises with more cross-border products and services.



Historically, the years before the global financial crisis saw a rapid growth in the cross-border activities of banks. According to the Bank for International Settlements, the average year-on-year growth rate for cross-border bank credit to non-banks from 2000 to 2007 was 15.2 percent. European banks were in the vanguard, with around one-third of their assets outside their home markets. However with the homeward migration of European banks opportunities have opened up.



Whilst Chinese banks may be facing slowing growth in profitability in the domestic market as financial reforms and the slowing economic growth begin to bite. To some extent, developing their international business can help them diversify income streams and disperse risks.



Choosing regions of growth is vital to the success of banks' internationalisation. With Chinese trade and investment with the rest of the world becoming increasingly diverse, Chinese banks must further expand their global network so that they can have a larger coverage of overseas businesses: banks are giving greater importance to delivering financial services in Asia, Africa, the Middle East and Latin America. Organic growth within the chosen region will be a fundamental way of developing Chinese global banks, though it may take time to achieve this goal.



In the early stage of internationalisation, Chinese banks are placing a strong emphasis on corporate banking and cross-border services, rather than retail banking. There is a huge potential in corporate banking in growth areas such as international settlement and cross-border payment, which bring fee-based income. Trade finance, cross-border cash pool management and bank loans have all played important roles in facilitating world trade, investment, manufacture and innovation.



Risk management capabilities are vital for any bank's survival during its journey to internationalisation. Since global businesses may encounter more challenges than domestic ones, Chinese banks need to revitalise their risk management processes in order to ensure that their capital, liquidity, credit and national risks are all controlled at a level aligned with the bank's global strategy.



While the Chinese Big Five banks are now on the list of the World Top 10 Banks by market capitalisation, there is still a long way to go to make them truly international. Whilst Chinese banks will continue to pair with Chinese business expanding overseas this will naturally lead to the globalisation of the RMB and an increase of RMB reserves held by foreign nations.





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