As the rubble and ash of the financial crisis of 2008 began subsidizing, Chinese banks began lending tremendous volumes in a bid to stimulate economic growth, alongside state-backed initiatives targeted at increasing infrastructure spending both domestically and abroad. For banks, financing President Xi Jinping’s infrastructure initiative known as “One Belt, One Rose,” represent another cash project with promises of greater profitability along ancient trade routes, amid faltering returns at home which force many banks to outperform others in order to exhibit resounding financial strength.
According to the Wall Street Journal, three of China’s four largest lenders reported greater increases in overseas lending than in domestic corporate loans, as China seeks to increase their global influence and occupy larger market shares within the international financial system. As such, Chinese banks have steadily carved out a bigger presence in some of the priciest business centers within the world to glorify their assent to financial supremacy. The Bank of China Ltd. last year moved its U.S. headquarters to a 460-foot-tall glass tower in Midtown Manhattan.
In addition, the Bank of China, the fourth-largest Chinese lender by assets, took on 1.7 trillion yuan ($246.8 billion) loans outstanding in overseas loans, representing a 10.6% increase from 2015. This massive disparity between both domestic and international loans serves as the first time the rise in overseas lending (166.2 billion yuan) shadowed the increase in domestic corporate loans (94.6 billion yuan). In response to this increase, Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp., China’s top top lenders respectively are beginning to institute measures to gain greater exposure to foreign markets within the western hemisphere, while the Agricultural Bank of China Ltd., has sought to capture opportunity within the domestic space as more of its Chinese counterparts begin to expand their operation into international markets.
Though overseas loans still dwarf the domestic loan book, opportunities overseas have begun rising with the need for international financing in wake of post-financial crisis regulations that serve to burden banks with tremendous operating costs. Furthermore, banks look to the premise of higher bank fees, and off balance investment products within the derivative space to compensate dwindling domestic interest earnings on domestic corporate loans. Five years ago, Bank of China loaned l yuan abroad for every 3.3 yuan domestic, now that number has decreased with 1 yuan being loaned abroad for every 2.6 at home. As Bank of China President Chen Siqing said when referencing the bank’s offshore dealings, “We may be slowing in our pace, but we’re accelerating in our restructuring.”
At an earnings conference on Mar 31, Mr. Chen shifted company focus from domestic growth which toted a weakened economy, to the bank’s overseas gains as a potential profit pool for future investments and lending on behalf of the bank. As a result, the Bank of China in 2016 offered an average 2.5% interest rate on overseas loans, two points lower than domestic corporate loans as a means of rallying attention from financial firms and overseas business looking for a cheap source of funding. Executive Vice President, Gao Yingxin, noted that despite the lower interest rates offered by the Bank. overseas lending has posted a 39% increase in profit.
ICBC posted a 26% increase in overseas loans in 2016, a massive uptake in compared to more traditional domestic loans which only managed to rake in a measly 0.2% increase. Construction Bank claimed that their overseas loans grew 31% alongside a 3.2% in profit from the year prior,, compared with a measly 1.5% growth in domestic loans.
Projects such as the before mentioned, “One Belt, One Road” plan accounted for roughly 15% of the overseas loans at Bank of China and ICBC, as volumes began encroaching upon domestic loans a double-digit pace, with the banks collectively extending more than $50 billion last year to more than 400 projects. ICBC described “One Belt, One Road” as a fiscally driven for the banking sector, noting that it “will produce a large number of high-quality investment opportunities.”
Yet, while overseas loans begin to show signs of increasing in the year following, the outward pace of direct investment of china serves to simply validate some U.S. sentiment that China is expanding at a rate far greater than their system can hold and run the risk of extending their credit line far beyond healthy reserves, which may turn back to haunt them in the event another mass default were to strike its debtors.