1. Comment
PA G E 1 1C H I N A D A I L Y E U R O P E A N W E E K L YM A Y 2 0 - 2 6 , 2 0 1 1
By LI ZHONGMIN
I
t goes without saying: Global-
ization of the Chinese financial
industry is key to the globaliza-
tion of China’s enterprises.
If China doesn’t have a sound
financial industry, there’s no
way its industries will expand
overseas.
In the early 2000s, only Chinese
commercial banks were making
headway in their overseas expansion
plans, but after 2009, overseas invest-
ments from throughout China began
picking up.
Overseas direct investment
(ODI) from China is that in 2007,
ODI was $1.67 billion (1.17 billion
euros). The figure reached $8.73
billion in 2009.
There are three main reasons for
the sharp growth. The demand caused
by ODI from nonfinancial industries.
To meet the demand of nonfinancial
enterprises, Chinese commercial
banks and other financial institutions
sped up outbound development.
Second, China Investment Corpora-
tion, in 2009, increased investments
in the midst of the financial crisis.
The total investment amount report-
edly reached $6.54 billion in 2009.
Third, the financial crisis made
some financial assets undervalued.
Some financial institutions then sold
their Asian assets selectively, which
provided a great opportunity for Chi-
nese financial institutions to swoop in
on inexpensive prices and plan their
global expansions.
Thus far, there have been losses and
gains in China’s overseas investments
from its financial industry, which
didn’t take advantage of the crisis.
Fortunately, the potential for overseas
investments is still great. If the finan-
cial industry speeds up its plans for
overseas investments, it would lay a
solid foundation for China’s improv-
ing global competitiveness.
As the Chinese financial industry
transitions into globalization, various
financial institutions need to apply
for licenses to conduct commercial
banking, asset management and pri-
vate banking. But the more important
task for Chinese financial institutions
is to enhance their service capacity
for Chinese enterprises overseas.
Right now, there are many favorable
conditions for outbound investment of
Chinese financial institutions.
Chinese financial institutions
already have a foothold overseas. The
proportion of overseas assets and
revenue has increased steadily. More
and more commercial banks have
adopted the practice of mergers and
acquisitions (M&As) as the major way
of outbound investment.
The financial crisis provided the
best investment opportunity for Chi-
na. The US subprime mortgage crisis
and the European sovereign debt
crisis severely broke the financial
system and institutions of the West.
But the bad thing is that Chinese
financial institutions barely grabbed
onto the opportunities at their feet.
In 2008 and 2009, when the crisis
was the severest, M&As sharply
declined from a peak in 2007, with
figures of $2.5 billion and $1.29 bil-
lion, respectively.
This shows that after the global
economic collapse, Chinese financial
institutions made inaccurate judg-
ments and underestimated the stimu-
lus measures of other nations’ central
banks (especially the US Federal
Reserve). Chinese financial institu-
tions also did not fully understand
the influences of the financial crisis.
The economic recession had a limited
impact on most of Asia. Some coun-
tries, such as Japan, made full use of
the crisis and increased their overseas
M&As.
Fortunately, judging from the cur-
rent financial market and economy in
Western countries, excessive liquid-
ity will not save their weak econo-
mies and financial industries. High
unemployment rate and low revenue
indicate that the effects brought by
the financial crisis will not disappear
in the short term. The pressure on
Western commercial banks will not
be reduced until 2019. That is to say,
during this time, many M&A oppor-
tunities will still be there for Chinese
financial institutions.
The globalization of nonfinancial
industries has created new demand
for financial industries. According to
the Ministry of Commerce, in 2010,
ODI from nonfinancial industries
reached $59 billion; total ODI was
$258.8 billion. The surge in ODI
between 2003 to 2009 has increased
the demand from Chinese enterprises
overseas. But they are small in scale
and have incomplete credit records,
so it is difficult for Chinese enter-
prises, especially small- and medium-
sized enterprises, to receive financial
support overseas. Domestic financial
institutions in China should support
them with bank credit and offshore
financing.
Besides credit and loans, domes-
tic financial institutions (especially
domestic investment banks), could
provide consulting services on out-
bound investments and M&As. Right
now, most of the overseas M&A have
to rely on foreign investment banks
and law firms.
But in the aim to develop further,
Chinese financial institutions are
still facing challenges. It is a critical
moment for Chinese financial indus-
tries to make some strategic adjust-
ments.
First, they should adjust their bal-
ance sheet structures. Most Chinese
commercial banks rely too heavily
on deposits and loans. At the end of
2009, the deposit ratio and loan ratio
for all four major commercial banks
reached 90 percent and 50 percent,
respectively.
Meanwhile, the deposit ratio for
Western commercial banks ranges
between 30 percent and 50 percent.
The main reasons are because con-
sumers and enterprises in the West
spend a great deal and have low
deposit rates. They tend to increase
their income by investments rather
than deposits. Therefore, to gain
a foothold in the overseas market,
Chinese financial institutions should
perform more financing from bonds
markets and increase the ratio of
agency bonds in their portfolio.
Secondly, Chinese financial institu-
tions should push to increase profits
from the capital market because
once the proportion of deposits and
loans falls, the original business
model would be at a great risk.
Third, they must adapt to their
customers. Currently, the purpose of
Chinese financial institutions is not
to become global financial organiza-
tions, but to provide consulting and
financing services for Chinese over-
seas investments. For this reason, the
locations of overseas branches should
be at countries and regions that are
key to Chinese overseas investment,
such as investments in resources in
Australia and Canada, and manufac-
turing in Europe and in the US. Insti-
tutions should also account for the
nations’ local economic environment
and regulations to reduce risk.
The rise of China’s financial indus-
try plays a key role in the country’s
global economic status but it needs
strong government support. The
Chinese government should pay
attention to the globalization of the
financial industry and solve a num-
ber of problems.
One of the problems is solving the
issue of funds outstanding for for-
eign exchange. Chinese commercial
banks usually deposit 15 percent of
assets with the central bank; Euro-
pean commercial banks, on the oth-
er hand, deposit about 4 percent of
their assets. These deposits aren’t as
profitable and Chinese commercial
banks are running the risk of having
a poor revenue stream and losing
out on their global competitiveness.
The second problem is the supple-
ment of capital funds through various
channels. Chinese commercial banks
should further inject capital and
diversify their shareholders.
Another purpose of injecting more
capital is to reduce the operation risks
of Chinese commercial banks. The
financial leverage is quite high for
the four major commercial banks of
China. Without enough capital funds,
these banks might not be able to
keep their operations afloat and some
might even encounter unpredictable
problems.
One possible solution is to have
State-owned enterprises as their
shareholders. Some SOEs have pur-
chased several small and regional
commercial banks, but these banks
aren’t capable of going global. It is
more practical for commercial banks
such as Industrial and Commercial
Bank of China and Bank of China to
shoulder this task.
The last problem is the difficulty
in adopting a more market-oriented
and international management. Major
commercial institutions should reform
how they appoint officers and employ-
ees. First, employ suitable people to
run China’s financial institutions and
separate ownership from manage-
ment. Let the market determine the
course of operations at commercial
banks. Second, maintain the term of
chairman while extending the term of
office of general manager and board
of management, set the term of office
of general manager based on perfor-
mance, and provide more effective
incentives for long-term investments.
The author is an investment research
fellow with the Chinese Academy of
Social Sciences.
Financial firms need to go global
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