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CommentJuly 1 2013

A poisoned chalice for China?

The growth of China's banks, into the world's largest and most profitable institutions, is not necessarily a good thing for the country.
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China’s banks have put in a storming performance in this year’s Top 1000 World Banks ranking. For the first time ever, a Chinese bank topped the ranking and as well as being the global leader in Tier 1 capital terms, ICBC is also the largest bank in assets, profits, deposits and by market capitalisation.

On top of this, Chinese banks hold all four top places in the highest profits table by institution and as a group, the 96 Chinese banks in the Top 1000 made $239bn – nearly $100bn more than US banks, which reported the second largest country total.

The phenomenal rise of the Chinese banks clearly reflects decades of double-digit growth in China’s economy and, for the most part, improvements in management and technology have gone alongside this enlargement.  

But, as the West has discovered over the past few years, a rapid expansion in the financial sector can be a mixed blessing, especially if it revolves around asset bubbles rather than genuine economic improvement.

The health or otherwise of China’s financial sector has been a cause for concern to both analysts and regulators for quite a while. The reflation of the economy in the teeth of the crisis was done by bank credit expansion on such a scale that some asset losses appeared unavoidable. A lot of that credit went into property, as its final destination, even if it appears on the books as municipal or corporate lending.

Strict controls on interest rates have also pushed the growth of a shadow banking sector based on loan securitisation. Fitch estimates that 36% of outstanding credit resides outside of bank loan portfolios and yet banks are involved, directly or indirectly, in three out of four shadow finance transactions.

The Chinese authorities are attempting to steer things to a better place through a mixture of tough talk followed by reassurances. Their chances of avoiding a meltdown are improved by a closed capital account to prevent money from leaving, bank funding that is both domestic and deposit driven and Rmb19,000bn ($3000bn) in reserve requirements held at the central bank.

But it is ironic that just as Chinese banks reach the pinnacle of The Banker’s rankings, the outlook for their future short-term performance takes a turn for the worse.

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