When The Banker meets Wang Hongzhang, China Construction Bank's (CCB) chairman, he is celebrating the opening of the new international headquarters for the bank's aircraft leasing arm in Dublin and the inauguration of its new London branch. Just a few days prior, CCB had listed its debut Rmb1bn ($156m) offshore renminbi bond on the London Stock Exchange. Coinciding with China president Xi Jinping’s October state visit to the UK, Mr Wang’s trip to London could not have been timelier in highlighting Chinese banks’ growing presence in the European market.
Expanding overseas has become a priority for a number of Chinese banks. Interest rates at home are low, net interest margins are thin and non-interest income is weak. International business offers a new and better source of revenue.
By the end of 2020, CCB aims to grow total assets abroad from Rmb1050bn (as of June 2015) to Rmb3500bn; and increase overseas pre-tax profits by 7% from a base of Rmb2190bn (as of June 2015). “I think we'll hit these targets early thanks to the renminbi business abroad developing very quickly,” says Mr Wang.
Europe focus
CCB became the London renminbi clearing bank in June 2014. Business has boomed ever since, with CCB UK clearing about Rmb6bn of transactions per day in 2014.
The bank is also expanding across Europe, with the region being one of the preferred destinations for the country's firms as China’s growing outward direct investment increasingly focuses on developed markets. Trade in goods between China and the EU reached €428bn in 2013, almost double the value recorded in 2005, according to data from Deutsche Bank.
“CCB has always followed Chinese firms' investment process in Europe. But they don't just need financing – they already have strong capital. They also need mergers and acquisitions [M&A], settlement and financial advisory services,” says Mr Wang.
Not even the risk of a Brexit – the UK leaving the EU – deters Mr Wang from growing CCB’s presence in the region. “For banks, the entrance or exit [of a country] from the eurozone is most important. [A country] exiting the [EU, by comparison,] is mostly a government’s internal affair, on which we do not have further comment,” he says.
Germany focus
Germany is leading the way in Sino-European commercial relations, with Chinese M&A in Germany – China’s top European trading partner – ballooning from a meagre $98m in 2010 to $2.5bn in 2014. And CCB is jumping on this bandwagon. “In Germany, we work with the motor and medical industries a lot. We [also] help Audi's operations in Jilin province with trade settlement services,” says Mr Wang.
Elsewhere in Europe, come the end of 2016, CCB will have set up new branches in Italy, Austria and Spain. Italy is of particular interest. Banks expanding abroad rarely offer financing to local firms – they prefer to support companies from their own country investing or trading overseas. But CCB is now providing credit to Italian small and medium-sized enterprises (SMEs) in addition to supporting Italian and Chinese firms’ cross-border investment and transactions.
“There are many SMEs in Italy with strong needs for capital. When I met Italy's minister of finance and Italy's minister for economic development in June this year, they both hoped that CCB could provide financial services to Italy's SMEs. When we had this discussion there were 20 to 30 Italian SMEs in dire need of capital,” says Mr Wang. CCB opened its first Italian branch in Milan in July 2015, followed shortly by a second branch in Rome.
Fed hike
While Europe offers significant opportunities for CCB, across the Atlantic, the US represents a risk, at least until the Federal Reserve hikes interest rates – an event that markets have been waiting anxiously for.
“[The Fed hike] is a double-edged sword. The effects on China's trade will be more negative than positive,” says Mr Wang. “The appreciation of the US dollar will put pressure on the depreciation of the renminbi. This would benefit exports but also challenge foreign direct investment [FDI] into China.”
This could be problematic for China, which still needs to attract FDI for newer hi-tech industries even if it is striving to develop a consumption-driven economic model.
China’s readjustment
While working to upgrade its economic model, China is facing a slowdown in the break-neck pace of growth it has experienced over the past three decades. Among the effects on banks, pressure on non-performing loans (NPLs) is often highlighted by analysts.
“For many years, NPLs [in China's banking sector] were less than 1%. In the past two years, NPLs have started growing to about 1.5%,” says Mr Wang. “Our NPL ratio has grown from 0.9% in 2012 to 1.4% to 1.5% in 2015. It will continue to grow for the next 12 to 24 months, probably up to 2%.
CCB has already adjusted its lending portfolio to counter this trend. “In the past two years we have adjusted our credit structure to put more credit to low-risk clients, such as mortgage and consumer loans. We have [also] decreased the proportion of credit to assets and increased non-credit assets. This has led to increases in fee-income,” says Mr Wang.
Growing fee income is crucial now that a low-investment-rate environment and China’s new deposit insurance is forcing banks to diversify revenue sources away from conventional lending.
Hot summer
In addition to a growth rate readjustment, China also faced a tough time this year in the currency and stock market space. The central bank – the People’s Bank of China (PBOC) – revised the renminbi downward in a surprise move in August 2015, which hit cross-border flows and overseas institutions holding the currency.
The renminbi is not a freely floating currency; China sets the value of the yuan against the US dollar. The currency is allowed to move 2% above or below that value, which is called the daily fixing. But in August 2015, the PBOC announced the fixing will be based on how the renminbi closes in the previous trading session. As a result, the yuan’s fixing weakened by 1.9% overnight following the announcement.
To add to the volatility, the Chinese onshore stock market crashed dramatically, with the Shanghai Stock Exchange Composite Index plummeting by almost 2500 points between mid-June and late August. The Chinese government responded to this freefall with heavy-handed intervention, which went as far as freezing new share offers and making it illegal for large investors to dump shares in the market.
While many analysts found this too invasive, Mr Wang believes the state had no choice. “During normal fluctuations, the government does not intervene. But this time, the stock market crashed by 2500 points. We saw fear and panic. The government's intervention was inevitable,” he says.
What is more, Mr Wang argues similar government intervention has occurred outside China’s borders. “Other governments would have intervened if they saw a similar situation. Take the subprime crisis in the US, when the Fed intervened, or the Asian financial crisis in 1997, when the Hong Kong Monetary Authority provided capital support,” he says.
However, even Mr Wang agrees with many international analysts when he says that the scar left by the stock market crash and the intervention that followed will take time to heal for global investors. “This had a negative impact on investors' mindset. It will last for a while. But with the Chinese economy moving forward for the better… I believe that investors’ confidence will grow stronger,” he says.
Clearing the shadows
International investors are also still spooked by China’s shadow banking sector – unregulated financial institutions – which analysts argue exist to support the less lucrative market segments – SMEs, for instance – that China’s 'big four' banks (CCB, Bank of China, Industrial and Commercial Bank of China and Agricultural Bank of China) have historically ignored.
But Mr Wang argues the shadow banking problem is being overblown. “The overall scale is not as huge as some say. Some shadow banks now are even subject to strict regulation,” he says.
The PBOC has taken some steps in this direction. New privately owned, tech-savvy banks, including Tencent’s WeBank and Alibaba’s MYBank, are now subject to financial regulation. To CCB, these new privately owned banks pose no threat. “They are not a challenge at all. Their scope is not large and the model is not sustainable. Customers' security is also a concern. The client base is not that strong,” says Mr Wang.
But as the 'big four' are renewing their interest in SMEs – some analysts say out of necessity to diversify revenue sources – some competition could arise. “[SMEs] are key in China, even for a large commercial bank. We want to adjust our own business model to lend more to SMEs,” says Mr Wang.
For now, however, China’s banking giants remain undeterred by new market entrants. As one Beijing-based senior banker once said: “[Alibaba founder] Jack Ma said: ‘If banks don't change, we'll change the banks.’ As far as I am concerned, he's failed so far.”
