Of Special Interest
26th June 2012
Bank of China chairman speaks on international expansion
Xiao Gang, chairman of Bank of China, wrote a very interesting article as to why banks in China needed to accelerate their plans to expand internationally despite the difficult global financial markets currently. Bank of China is the most international of the major Chinese banks and already gains 23% of its profit from international operations.
He starts the article by stating:
"China has become the world's second-largest economy, with its increasing integration into the global economy. There is good reason to believe that the Chinese economy has reached a point where its status as the biggest export country will lead it to become the biggest in outbound direct investment. This new model not only requires Chinese enterprises to expand their global businesses, but also China's banking sector to accelerate its internationalization."
He moves on to discuss the growth of multinational organisations within the BRIC nations and the rapid growth of consumer markets within these countries and states:
"Moreover, innovation is no longer a "patent" belonging to developed economies, as more enterprises operating in emerging economies have become a source of innovation.
"Nowadays, in the midst of the ongoing financial crisis, it is crucial for Chinese companies to adopt a "go-out" strategy. Such a process has already started to help them enlarge their "growing space", break natural resource bottlenecks, shift part of their overcapacity and extend value chains by making fuller use of overseas markets."
He mentions also, "China has accelerated its outbound direct investment, totaling $437.3 billion in 178 countries and regions by the end of last year."
Referring to the Euro crisis he details that between 2000 and 2007 cross-border credit to non-banks rose by over 15% a year. He contrasts this with the IMF projection that European Union banks will undergo a "$2.6tr deleveraging over the next two years".
Xiao Gang argues that Chinese banks should give priority to Chinese enterprises followed by foreign firms with close ties to China. After which, "Chinese banks should attach more importance to delivering financial services in Asia, Africa, the Middle East and Latin America, either by building up operating entities or through deepening cooperation with corresponding banks around the world".
Organic growth is preferred by Xiao Gang though accepting there are circumstances where strategic logic can favour M&A. An interesting comment included within the challenges of international business was that Chinese banks need to 'revitalize their risk management'. He said that this was required "in order to ensure that their capital, liquidity, credit and national risks are all controlled at a level aligned with the bank's global strategy".
He concluded by stating, "While China's four biggest banks are among the world's top 10 banks measured by market capitalization, there is still a long way to go to make them truly international. Every journey begins with the first step. Like the internationalization of the Chinese currency, the development of Chinese global banks is inevitable. The time has already arrived."