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Globe: Chinese Banking Giants Intense Global Expansion

[Editor’s Note: An article from Globe, a bi-weekly publication of Xinhua News Agency, gives an account of how the expansion of Chinese banks overseas has been accelerating since the financial crisis. “Some people in the industry believe that, during the crisis, certain countries made it easier for foreign banks to set up shop in their countries in order to help their own financial industries. The relatively low cost of entering foreign markets provided a rare window of opportunity for Chinese banks.” Excerpts from the article are translated below.] [1]

For the past month or so, the busiest banker might have been the chairman of China’s Industrial and Commercial Bank (ICBC), Chairman Jiang Jianqing.

Since January 18, 2011, ICBC has opened five branches in Europe, at the rate of one branch per day. To preside at the opening ceremonies of the five branches, Jiang has been traveling across Europe nonstop, from Paris to Brussels and from Amsterdam to Milan and Madrid. Afterwards he went to Davos in Switzerland  to attend the World Economic Forum (WEF).

In this small town, this Doctor of Business Administration, who once masterminded ICBC’s IPO, announced, “ICBC is willing to expand its business around the world!”

Jiang’s footprint clearly mapped out ICBC’s rapid overseas growth. This can be traced back to as early as 2009, when ICBC reached an agreement with the Hong Kong-based Bank of East Asia (BEA) to purchase 70% of the shares of stock in the Canadian branch that BEA owns. When ICBC’s five European branches started business, it spent US$140 million to purchase 80% of the shares of stock in BEA’s U.S. branch.

As China’s largest commercial bank, ICBC is actively expanding its business overseas. It is indicative of the fact that the Chinese banking industry is expanding worldwide through opening overseas branches, overseas mergers and acquisitions, and overseas cooperation.

Speed up “Going abroad”

Although it is not uncommon for Chinese banks to set up branches or deal in M&A’s overseas, the pace has been slow. Ever since the onset of the global financial crisis in 2007 and 2008, the pace of “going abroad” has accelerated.

Here are examples from the four, big, state-owned banks. Side by side with “frequent moves” of ICBC, the China Construction Bank (London) Limited (CCB London) was launched on June 1, 2009. One year later, CCB started its Sydney branch. In December 2010, the Bank of China’s (BOC) German and Belgian branches opened, and one month later, this highly globalized Chinese bank’s New York branch officially offered Renminbi services. News media reported that the Agriculture Bank of China (ABC) that just finished its IPO in 2010 was actively applying to open branches in London and New York, while focusing on Southeast Asia as its key region for global expansion.

BOC’s Chairman Xiao Gang released some figures: In 1985, the Chinese Banking industry’s overseas assets were valued at only a little more than US$9 billion; by 2009, they surpassed US$270 billion. By the end of 2009, the number of overseas Chinese banking institutions exceeded 1,200, with business covering 32 countries and regions.

It is not difficult to conclude from the timing that the global financial crisis was the impetus for the Chinese Banking industry to intensify its efforts to expand abroad. Some people in the industry believed that during the crisis, certain countries made it easier for foreign banks to do business in their countries in order to help their own financial industries. The relatively low cost of entering those markets provided a very rare window of opportunity for Chinese banks.

Pan Nuo, General Manager of BOC’s Paris branch, also mentioned that the rapid growth of his branch in the recent three years benefited from the high growth of the domestic economy, more and more Chinese corporations going abroad, globalization of the Renminbi, increasingly close economic and trade relations between China and France, and other factors. Many banks were hit hard by the global financial crisis. However, the Chinese financial industry seized the opportunity and quickly rose in stature.

However, there is also a belief in the industry that the opportunity provided by the global financial crisis is only part of the story. Fundamentally, the national strategy, the internal demand for banks’ own development, and the continuous integration of the Chinese economy into the global economy all call for Chinese banks to expand abroad.

At the national level, this year’s Central Economic Working Conference again emphasized implementing the “expand-abroad” strategy. “The Suggestions for the Twelfth Five-year Plan” passed by the Fifth Plenum of the 17th Central Committee of the Chinese Communist Party also proposed gradually developing large multinational corporations and multinational financial institutes.

When Globe magazine interviewed them, many financial and economic experts and scholars expressed the following views: China is now transforming from primarily utilizing foreign capital toward paying equal attention to both attracting foreign capital and investing overseas. With the accelerated pace of Chinese corporations expanding abroad, the Chinese currency will also “go abroad,” so banks “going abroad” will follow. On the other hand, the ever intense competition within the Chinese banking industry and the pressure of domestic inflation also necessitate the “expand abroad” strategy. …

Debate on the “Timing”

From their operating practices, the senior management of Chinese banks also maintain discretion. Although at Davos, Jiang Jianqing clearly stated the determination that ICBC would “go abroad,” he also said that (ICBC) “will proceed carefully and cautiously” for a long period of time.  “In the foreseeable future, our focus will be on the emerging markets because of the good prospects for development. Regarding the U.S. market, our development will be very cautious.”

China Merchant Bank’s (CMB) President Ma Weihua also spoke frankly, saying that the success ratio of mergers and acquisitions worldwide is very low. “If we go abroad for mergers and acquisitions, we are not very confident of success in Europe and the U.S.”

In recent years, the China Development Bank (CDB) also tried to invest abroad, but with no success. In 2008, the CDB’s bid for Germany’s Dresdner Bank AG under Allianz Insurance was rejected. Additionally, CDB injected funds into Aluminum Corporation of China (CHINALCO) to assist in its purchase of minority shares of the global mining giant Rio Tinto. Its bid was also aborted.

BOC was once involved in an overseas lawsuit. Between 1991 and 1999, three U.S. branches, including New York and Los Angeles, were accused of “improper conduct.”

Compared to energy companies that “went abroad” earlier, Chinese banks have received much less “interference.” The latest ICBC launches in Europe received a warm welcome. It was reported that months after the planning and preparation, different European countries had already reviewed and approved the licensing applications.

On the one hand, Europe and the U.S. do need an external “savior” in the financial and debt crises. On the other hand, China’s commitment to providing support for troubled Eurozone economies by increasing investments and debt purchases has helped these countries to gradually change their attitudes.

However, this is not to deny that non-financial factors may get in the way of Chinese banks “expanding abroad.” The French newspaper Le Figaro’s website published an article on January 28 titled, “When China Buys the Entire World.” It used the launch of ICBC’s Paris branch on January 18 as an example, saying, “Today the Chinese’ expansion around the world is unrestricted. They want to buy everything: companies, land, harbors, debts, … What if 10 years later China becomes the number one economic power?”

More than once, people in the industry have issued warnings that Chinese companies need to take local countries’ political and cultural conditions fully into consideration. They have to be extremely careful of the rise of all kinds of post-crisis protectionism.

[1] Xinhua, “Globe: Chinese Banking Giants Intense Global Expansion,” March 9, 2011.