China’s banks are laden with cash and ready to take on the world – just as the Japanese banks were half a generation ago.
The parallels are not lost on regulators in China or those in the developed world, who are wary about allowing banks that were insolvent just a few years ago into their domestic markets.
Beijing issues regular warnings to Chinese lenders to improve their risk management and has so far only approved a handful of small offshore acquisitions.
Stringent entry requirements from regulators in markets such as the US provide another hurdle for the likes of Industrial and Commercial Bank of China and China Construction Bank, which now rank among the world’s biggest in terms of market capitalisation.
However, they still derive only 3.1 per cent and 0.8 per cent respectively of their pre-tax profits from their overseas operations.
Bank of China is the only one of the nation’s state-owned lenders that has any significant offshore presence, and the vast majority of that is made up of its operations in Hong Kong and Macao.
Comments by Jiang Jianqing, the ICBC chairman, on Tuesday on the bank’s applications for licences in Russia and the US are the most aggressive signal yet of its plan to become a global player – and ICBC is not alone in its ambition.
CCB, BoC and their smaller rival Bank of Communications, all talk of their intentions to become institutions with the global status to match their size and importance at home.
With runaway headline growth of more than 11 per cent, inflation creeping up and worries about an asset bubble forming in the stock market, the government has been applying pressure to the banks to rein in lending.
This has them wondering what to do with all the deposits from China’s savers, not to mention the windfall from some of the world’s largest initial public offerings.
“This is an opportune time for them to take advantage of their valuations [in the Shanghai and Hong Kong stock markets] and think about overseas expansion,” said Simon Ho, head of Asian financial research at ABN Amro. “But behind the scenes they are more cautious and say they will look first at Hong Kong and south-east Asia.”
For now that means relatively small investments such as CCB’s purchase last year of Bank of America’s Hong Kong and Macao operations for $1.24bn.
This year ICBC bought the minuscule Bank Halim Indonesia, a privately held lender with assets of only $50m.
But some think it could be just a matter of time before the banks start hunting for larger prey outside their backyard.
“ICBC would certainly be interested if they were given the opportunity to buy, say, Standard Chartered,” Mr Ho said.
It is unlikely that Beijing, let alone regulators in the rest of the world, would agree to allow a Chinese bank to acquire a big global institution right now, not least because Chinese lenders are still very unsophisticated compared with their foreign rivals.
Profits at the banks have been growing rapidly in recent years but most of their income is still from “plain vanilla” loans that rely on the central bank to fix a floor on lending rates and a ceiling on deposit rates to guarantee a healthy margin for the state-owned lenders.
The range of products and services available to customers in China is still ext-remely limited and banks’ managements are still made up of political appointees.
With the help of generous government bail-outs non-performing loans at the biggest Chinese commercial banks have dropped to an official average rate of 7 per cent, from estimates of more than 30 per cent in 2001.
But many analysts believe official numbers underestimate the true scale of the residual problem and say the banks would quickly run into trouble in the event of even a minor downturn.