Total net private capital flows to emerging markets continued at a strong pace in 2006 but the volume is expected to ease somewhat in 2007 in line with an expected moderation in world growth, according to the Washington-based global association of financial institutions, the Institute of International Finance (IIF).
The 2006 total of $502bn was just below the record of $509bn in 2005 and the IIF forecasts that the 2007 volume will be about $470bn.
Net direct investment could set a new high of $211bn in 2007, following $185bn in 2006, the IIF forecast. Asia, led by China, remains the largest regional source of direct investment, but the report highlighted, in particular, the rapid rise of direct investment into central and eastern Europe. Net commercial bank flows in 2006 exceeded $140bn for the second year in a row, the IIF reported, and it projected a lower 2007 volume of about $100bn.
Dr Josef Ackermann, chairman of IIF and Deutsche Bank, noted: “It is important to underscore that sustaining a healthy environment for the global economy and international finance requires still greater efforts by the leading G7 industrial countries and the major emerging market countries to coordinate policies to reduce global imbalances and to guard against protectionist pressures. Leaders need to make every effort to secure a successful outcome to the Doha Round of trade negotiations.”
IMF WORKING PAPER:
THE RISE OF FOREIGN INVESTMENT IN CHINA’S BANKS
Increasing foreign participation has been one of the key trends in the Chinese banking system in recent years. Since June 2004, foreign investors have bought more than $17bn worth of shares in Chinese banks.
The International Monetary Fund (IMF) working paper, written by Lamin Leigh and Richard Podpiera, takes stock of the involvement of foreign investors in the Chinese banking sector.
While in most other countries foreign investment has meant direct takeover or majority shareholding, foreign investment in China’s banks has taken the form of minority shareholding with very limited management involvement.
As of end-September 2006, foreign-funded banks accounted for 1.8% of total banking assets. Therefore, how much influence foreign investment will have on the domestic banks’ core business – and, most importantly, risk management – is seen as debatable.
The paper, published in December 2006, concluded that China seemed well positioned to benefit from a further opening of the banking sector to foreign investors.
International experience suggests that greater competition from and participation of foreign banks can, in general, bring important benefits if appropriate incentives and sufficient opportunities are created. Some time would be needed before a more definite experience with the role of foreign banks in China could be identified, said the report.
