Banking industry in China continues to drive growth for the economy

reogma|Banking industry in China continues to drive growth for the economy
7 mins read

China banking system is one of the driving force of growth for the economy.

Definition / Scope

China is the second largest economy in the world by GDP and the value is $13.953 trillion USD. China is the fastest growing economy in Asia with an average of 10% over the years.

China is the largest importer as well as exported in the world. China is the largest manufacturing economy of the world. China banking system is one of the driving force for the commercial growth of the economy. People’s Bank of China is the central bank of the country.

It makes and executes monetary policy and manages the foreign exchange and gold reserve for the economy. China foreign exchange reserve consists of $3.2 trillion in 2016.

Market Overview

China consists of 4 state owned banks- Bank of China, China Construction Bank, Industrial and Commercial Bank of China and Agricultural Bank of China. According to the SNL Financial data Industrial and Commercial Bank of India was the largest bank in the country with the asset value 20.61 trillion Yuan at the end of 2014.

China Construction Bank Corp. 16.744 trillion Yuan. HSBC Bank China is the largest foreign bank having more than 140 outlets in China. Bank of Communications is the oldest bank and has overseas branches in Singapore, London, New York and Frankfurt.

There are different types of commercial banks that are setup in different parts of country which are named as City Commercial Banks, Village and Township banks.

reogma|Banking industry in China continues to drive growth for the economy

Market Risks

  • The biggest risk that the banking sector is going to face in the coming years would be default. The bank have loans of over $11 billion while the real value of the assets are $10.5 billion.
  • The structure of the shadow banking is not well regulated by the central bank. The international institution is tracking the activities of the shadow banking because of the risk associated to the financial system.
  • Global slowdown in the economies of the developed world which is affecting the global banking system of the developing nations like India and China.
  • Chinese securities companies like Haitong Securities Ltd are on the verge of making default which is going to affect the financial system of the country.
reogma|Banking industry in China continues to drive growth for the economy

Top Market Opportunities

  • China is the growing economy in the world. Loans and credits are one of the driving force for further investment in the industrial growth.
  • Shadow banking is one of the fastest growing medium of credit infusion in the economy. The rate of the shadow banking is much higher than the traditional banking system.
  • Central banks is reducing bank rates for further liquidity in the economy.
  • Central banks are buying government bonds and gold reserves for asset creation.
  • Investment in the economy is high in the economy as there is high amount of liquidity for business establishment in the country.
  • China is rich in foreign reserves because it is the top exporting country in the world.

Market Trends

  • The government is infusion more money in the banking system.
  • Central Bank is restructuring the banking system based on the foreign standards,
  • More capital requirements from different sectors of business.
  • FDI in the economy, bringing more funds in the economy.
  • Regulations in the shadow banking.
  • Europeans and USA banks are investing in the government bonds which is providing at the base rate of 4.5% which is higher than the bonds available in the developed nations.
  • Small and Commercial City banks are available providing loans to the small and medium businesses.
  • The country’s economy is growing at the faster rate as compared to other developed economy, so the need of funds is backed-up by the banking system of the country.
reogma|Banking industry in China continues to drive growth for the economy
  • Debt of the economy is 13.5% of the GDP, due to which the central bank is using different monetary instruments.
  • Less opportunity for the foreign banks to set-up commercial banks in China as the norms are stringent for lending.
  • Central bank is reducing interest rates due to which the liquidity is increasing in the economy which is causing problems for availability of real cash in the economy.
  • Fear of default in the banking system is creating fluctuations in the stock market which is causing outflow of cash from the economy.
  • Problems in the Chinese economy is affecting investors’ confidence in the Asian market.
reogma|Banking industry in China continues to drive growth for the economy

Industry Challenges

  • Maintaining international norms of Basel III is the major challenge for the banking system of different sizes in the country.
  • Debt of the banking system is higher than the estimation. Liquidity is the major challenge for the banks.
  • Fluctuations in the global banking system is highly affected in the Asian banking industry which includes developing country like China.
  • The load of debt is affecting the growth of the economy as well as the banking system.
  • Running a profitable local banks is a major challenges as the debt is more than the real asset value held by the banks of the country.

Technology Trends

  • China is the biggest trading nation in the world, so the banking system integration is a component for the money transfer.
  • Maintaining foreign reserves is also important component of banking system.
  • Integration of live money transfer.s
  • Inter and intra money transfer leading to cross border currency exchange.

Pricing Trends

The pricing of the banking system is determined by the interest rate of the Central Bank of China. Cost of lending and borrowing is determined by the repo rate and reverse rate.

The interest rate determines the liquidity of cash flow in the economy. 2008, showed the highest interest rate as the economy was suffering from the global slowdown and over-heating of the economy.

From 2012 onwards, there has been decline in the interest because of the slowdown of the economy and increase the liquidity in the economy. Currently the interest rate is in the range of 4.5% declared by the People’s Bank of China.

reogma|Banking industry in China continues to drive growth for the economy

Regulatory Trends

  • Central bank of the country is working on the restructuring in the shadow banking for disclosure of the funds to different sources.
  • Central bank is reducing the interest rate to infuse more liquidity in the economy.
  • The government is planning for International banks and commercial banks in the economy.
  • The government is making investment for technology integration of the small and commercial city banks.
  • Cross currency integration with major banks of other countries.
  • Central bank is pushing all the banks in the country to follow Basel III norms.
  • Issue of licences for the commercial banks through co-operative, subsidiary and co-operatives.

Market Size and Forecast

China consists of 4 largest banks in the group of Top 10 largest banks in the world. Industrial & Commercial Bank of China is the largest multinational bank in the world with a total assets of over $3 trillion.

It had the largest IPO with a market capitalization of over $21 billion in 2006. China Construction Bank is the 4th largest bank in the world with market capitalization of $2 trillion. Bank of China has the market capitalization of $1.5 trillion.

Agricultural Bank of China is the world’s third largest provider of funds. It had over 300 million retail clients and almost 25000 branches across the world.

Market Outlook

  • Fear of default risk by the top 4 banks of China according to Moody’s Analytic
  • About $11 trillion of assets and loans are used by the banks for the economy.
  • USA banks health would depend on two major banks like Bank of China and Industrial and Commercial Bank of China.
  • Securities in the country are also on the verge of default and it’s going to affect the financial system for the economy.
  • Total exposure by the foreign institutions is going to increase.
  • Overall borrowing has been over 200% of GDP.
  • Increase in the purchase of more T- bills from different countries.

Technology Roadmap

  • Deutsche Bank has implemented ERP System for cross border payments in China.
  • Bank of America Merrill Lynch has launched cross border cash pooling system for currency exchange across different parts of the world.
  • European and Shanghai stock markets are planning to integrate exchange of trades and strong banking integration is needed for cross border settlement of funds.
  • E- Banking development is needed for more cross border currency for the people as well as the small businesses exporting goods to different parts of the world.
  • Technology for financial services of the small and city banks are needed to implemented for proper integration with the system and customers.

Competitive Landscape

  • China is one of the growing country in the world so the demand of funds for the business expansion is required by the people.
  • Huge opportunities for the foreign banks to tap the market for the transfer of funds.
  • Government is executing plans for foreign financial institutions for further competition in the market.
  • Technology is the competitive service provided by the banks.
  • Small are providing loans to the small businesses.
  • Commercial City banks are increasing the network in the town and cities spread across the country.

Competitive Factors

  • Expansion of the businesses leading to the increased demand of credit.
  • Financial inclusion of the people of the country.
  • Reduced interest rate.
  • More liquidity in the economy.
  • More competition from the foreign companies.
  • Availability of funds to the economic development.
  • Support from the government.
  • Capital infusion to the banking industry.
  • Shadow banking is another financial instrument used by the banks at a faster rate than the traditional banking system.
  • Exposure of assets from the commercial banks.
  • Integration of high technology for the smooth flow of funds.

Key Market Players

  • Agricultural Bank of China
  • Bank of China
  • Bank of Communications
  • China Construction Bank
  • China Development Bank
  • Industrial and Commercial Bank of China
  • People’s Bank of China
  • Postal Savings Bank of China
  • China Merchants Bank

Strategic Conclusion

Chinese banks is one of the important sector for the global economy. China needs more reforms for the governance of the banking system. Chinese banks is having huge opportunity for asset creation.

Expansion in the international market is the untouched opportunity to increase the asset base. Implementation of the Basel III norms would stabilize the banking system reducing the risk of default in the coming future.

Advanced technology would be the driving force for expansion and explore new opportunities of growth.

Further Reading

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reogma|Banking industry in China continues to drive growth for the economyreogma|Banking industry in China continues to drive growth for the economy



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