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Opening Up 2.0 – The great financial overhaul

Chitra Negi is Research Intern at the Institute for Defence Studies and Analyses, New Delhi.
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  • February 14, 2011

    The week of January 18th saw the Industrial and Commercial Bank of China (ICBC) open five new branches in France, Brussels, Holland, Italy and Spain. On 24th January ICBC also made a $140 bid for a controlling stake in the Bank of East Asia’s US subsidiary. The deal awaits the approval of regulators. This is a part of the financial globalisation that is gaining momentum in China to secure future growth in a volatile post-crisis period.

    China is upgrading and restructuring its economy to boost its development in the current economic scenario. Already the largest exporter in the world its aspirations of becoming a global trade power are becoming increasingly apparent given the significant contribution of foreign trade to China’s economic growth in the past and the propitious environment of massive demand originating from emerging economies. The CPC Central Committee proposal for the 12th Five Year Plan also called for accelerating the Zouchuqu Zhanlue (venturing-out strategy) to undertake strategic investments drive overseas and to create highly competitive multinational Chinese firms to exploit the opportunities in foreign markets.

    This multidimensional scheme for sustaining future growth has raised the bar for China’s financial industry especially the banking segment. The traditional banking model of loans, deposit and settlement cannot cater to the sophisticated demands of an increasingly globalising trade power which is also restructuring its domestic economy. Economic restructuring will translate into a higher penetration of finance; challenges of diversified markets and products; and expertise in risk management. Exploiting the emerging foreign trade opportunities also requires banks to be with proficient in trade financing. Moreover financial sector is required to play the role of an enabler for the rapidly globalising industrial capital of China. The country has been encouraging industries with excess capacity to invest overseas and backing innovative and resourceful companies in creating strategic supply bases offshore as a part of the Zuochuqu Zhanlue.

    The lessons of the financial crisis and the post-crisis realities are another reason for the urgent overhaul of China’s financial system.

    The 2008 financial crisis magnified the risks embedded in the highly complex global financial industry. Innovative and complicated financial products like credit default swaps and the excessive indulgence that partly triggered the crisis are being viewed as challenges to China’s financial integration with the world as its bankers have limited knowledge of such complexities. Moreover banking regulatory requirements have also become more stringent due to strengthened international financial oversight, as was apparent in the passage of Dodd-Frank Financial Reform Act in the US, a pan-European financial regulatory bill in the EU and so forth. The post-crisis period also is marked by a protectionist paranoia where an extremely low macro policy coordination between the developed and developing world has resulted in a fragile global economic recovery.

    Banking is extremely important in China because of major state representation and the risks involved. Therefore the knowledge that the traditional banking system of China could suffer in a post-crisis period due to changed financial services requirements has made China speed up its financial integration with the world.

    However China’s financial integration will still be a fairly gradual process as big mergers and acquisitions can lead to political concerns abroad given the current tendency towards protectionism. Still the investment opportunities that have followed in the wake of the global credit crisis are being leveraged by China through purchase of non-controversial small stakes.

    The Chinese domestic environment seems to be encouraging forays into the international financial system. Chinese banks are flush with capital. Within Asia seven out of ten biggest banks, by total assets, are Chinese. On a global scale too four of China’s biggest banks find a place within the top twenty among such as BNP Paribas, Barclays and RBS. China’s Banking Regulatory Commission (CBRC) reported a rise of 20.4 per cent in the total domestic assets of China’s financial institutions in the banking sector till the end of last year. Moreover, the performance of Chinese banks during the crisis and also the domestic efforts of by CBRC to curb corruption and reduce non-performing loans have improved the international image of China’s banks.

    Strategic approach to globalisation will see Chinese financial institutions targeting new growth markets and potential partners to help expand their operational geography; develop core competencies; and create expertise in areas such as corporate governance, risk management, trade finance and so on to create a range of truly globalised and competitive financial institutions not only catering to the needs of Chinese businesses abroad but also becoming mainstream banks in foreign markets .

    China has embarked on the second phase of its opening up and is on the road to secure its future growth and pre-eminence on the world stage.