Mainland China's mega-lenders could make mark in 2014

PUBLISHED : Saturday, 28 December, 2013, 4:39am
UPDATED : Monday, 30 December, 2013, 2:12pm

China's banks are racking up foreign assets, driven by trade flows, and the country's corporate diaspora. Even at the current slow pace, what today looks like "following the client" could soon become "following everyone's clients".

During 2013, China's lenders abroad mostly stuck with what they knew - servicing Chinese companies. But there were firsts.

Agricultural Bank of China announced on December 2 it will offer clearing services for financial institutions in London trading in the yuan.

The clearing scheme, the first of its type in Britain, will be offered in tandem with Standard Chartered.

Industrial and Commercial Bank of China, the country's biggest bank by assets, sold 2 billion yuan (HK$2.5 billion) of yuan-denominated bonds in London in November, making it the second bank to do so after China Construction Bank. The offering was four times oversubscribed.

Those niche markets can still grow fast: the yuan is now the second most-used trade currency after the US dollar.

Takeovers look like the logical next step. China Construction Bank set the tone in November by buying a 73 per cent stake in Brazil's Banco Industrial & Comercial from the Brazilian lender's controlling shareholder family, valuing the whole company at US$1 billion. The transaction took around two years to come to fruition, according to people familiar with the situation.

Africa and Eastern Europe may see similar deals. ICBC has also been in talks for over a year to buy the UK-based commodities trading desk of Standard Bank, the South African lender in which it bought a 20 per cent stake in 2008. Even oil-rich Iran could be a target in a future sanctions-free world.

The challenge is not to make the same mistakes as Japan in the 1980s. Fuelled by an appreciating currency and a restrictive home regulator, Japanese banks started expanding abroad. By 1988, six of the world's 10 biggest banks were Japanese, according to The Banker. When bad debts rose at home the lenders retreated, leaving a credit crunch in their wake.

China's saving grace may be its banks' inexperience and government micromanagement. China Construction Bank's BicBanco deal was two years in the making; ICBC has been haggling over Standard Bank's UK commodities desk for over a year.

That limits the scope for impulsive and foolish deals. Capital controls also mean China's banks can't easily switch their onshore yuan into dollars or euros, limiting their ability to lend abroad.

Still, China is a land of big numbers. The top five banks' overseas loans totalled US$538 billion by the end of June, double the level of 2010 and close to the size of Ireland's entire domestic loan book. Even if global banks aren't yet losing business to China's mega-lenders, 2014 should see them start to take the prospect seriously.