China challenges the banking world

The progress of the Chinese economic juggernaut over three decades is well-known, despite its slower speed in recent years. Along with spectacular growth, China is developing a financial superstructure both to tool its economic future and reflect its arrival as a superpower.

North America and Europe traditionally dictated the shape of global banking regulations and its architecture. China is now exerting its influence and in each of the following key areas has been redrawing the world financial map:

The China International Payments System (CIPS): Launched this October, CIPS promises to rival SWIFT as the premier global messaging system and also to increase the renminbi’s international footprint. China wants to avoid its banking transactions to be routed through a system under which it can be subjected to penalties for processing payments for sanctioned entities, but prefers to call the shots instead.

The Asia Infrastructure and Investment Bank (AIIB): With 57 countries signed up as members, the institution set up in Shanghai to rival the World Bank was officially launched in June. It will disburse large loans to infrastructure projects at the discretion of the bank’s management and promote trade.

The role of China’s central bank:  A question mark hangs over the degree to which the People’s Bank of China (PBOC) supports the yuan (CNY) and renminbi (RMB). As the RMB ‘redback’ aspires to be a global ‘safe haven’ currency, should the PBOC still fix the RMB mid-rate each day, or leave this to the markets to determine? The PBOC’s recent devaluation against the US dollar by 2% was dramatic to say the least!

Developing an offshore market for RMB denominated ‘panda’ bonds: This promises to create an alternate funding source for global borrowers. HSBC was chosen in September to launch the first panda bond and the bank could well be China’s calling card in its western banking foray.

Using its large banks to finance projects and infrastructure in Asia and Africa: Four of the world’s top 10 banks are Chinese, with Industrial and Commercial Bank of China (ICBC) in pole position.

The China UnionPay card: Originally launched in March 2002, the card could break Visa and MasterCard’s global domination and get a piece of the huge interchange fees, branding and point-of-sale (PoS) business.

Promoting the RMB as a reserve currency for inclusion in the International Monetary Fund’s basket:  The IMF basket of key international currencies is reviewed every five years – the last review being at the end of December 2010. The RMB would join US dollar, Japanese yen, sterling and the euro, which go into calculating the value IMF’s special drawing rights (SDR). Inclusion will be symbolic of and thumbs up for yuan’s arrival on trading floors.

Encouraging the invoicing and settlement of trade transactions in yuan instead of dollars.

The rise of internet companies and their expansion into the banking space: Tencents (which launched WeBank in January) and Alibaba (which followed with MyBank in June) are examples of e-commerce giants with a treasure trove of rich customer data, which recognise its potential use to market financial assets. Alibaba’s finance arm has launched a credit rating service. It remains to be seen how these homegrown companies would fare without the Chinese internet firewall

The maritime Silk Road project: This is an economic trade route, linking China to distant markets under the so-called ‘one belt, one road’ policy; one that has brought it into stand-offs with Japan and the US over territorial rights to islands and reefs in the South China Sea. It has even attempted to enlist the support of Nepal over impassable Himalayan terrain – more as a symbolic gesture, but giving the clear message that boundaries do not matter.

Chinext: The popular exchange for startups launched in October 2009 along similar lines to the US NASDAQ and now trades at close to 50 times forward earnings – more than double NASDAQ’s.

Acquisitions: China is also encouraging takeover deals by its domestic banking sector to increase its cross-border footprint and has a substantial mergers and acquisitions (M&A) war chest.

Shadow banking: China has pioneered this lightly-regulated area of financial services, which lies outside the regulatory framework but provides a useful service by directing finance to business quickly. This is particularly so as where state owned enterprises (SOEs ) commands  the biggest slice of the credit pie – leaving China’s private sector, which creates 80% of jobs, with only 20% of loans.

Financial centres: China has enjoyed the advantage for nearly two decades of having a world class financial centre in Hong Kong. Shanghai is not lagging far behind either; the Shanghai Futures Exchange’s (SHFE) daily liquidity exceeds the combined liquidly of the London Metal Exchange (LME) and New York Mercantile Exchange (NYME).

Cleaning up: The country is in the midst of a massive anti-corruption drive, which has targeted the high and mighty. Even banks have not been spared: this month saw the vice president of one of its largest – Agricultural Bank of China -relieved of his duties, as he assists an anti-graft investigation. The campaign will go some way towards addressing governance and also the high and undisclosed level of stressed assets – one of the main areas of concern in Chinese banking.

Abolition of China’s one-child per family policy: The country also recently relaxed its one-child policy after 35 years, which could presage a baby boom ahead and credit growth

Each of these initiatives promises to enrich the financial landscape, providing choice, depth and competition – as well as leaving a firm Chinese imprint.

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