China on the way to becoming the world’s largest banking market

Globalisation, shadow banking system, superior regulatory architecture

Shanghai / Frankfurt am Main.

Horst Löchel and Chun Chang publish a collection of essays on the Chinese banking industry

• The Chinese banking market is well on the way to becoming the largest in the world. Despite all the restrictions, foreign institutions in China are experiencing much livelier business growth than in other parts of the world.
• In the near future, China will become a global player on the international financial markets.
• Under the influence of China’s state banks, China’s banking sector is shifting from segregated banking to full-service banking.
• The regulatory architecture underpinning China’s banking system is superior to the Western model; this became clear during the financial crisis.
• A “shadow banking system” is evolving in China that is compensating for weaknesses in the existing system.

These are some of the key findings in a collection of English-language essays now being published by Frankfurt School Verlag. Edited by Chun Chang and Horst Löchel, China’s Changing Banking Industry includes discussions and analyses by researchers and industry practitioners covering developments in China’s banking industry since 2006, examining the changing regulatory environment, and highlighting Shanghai’s rapid transformation into an international financial centre:

Chun Chang / Horst Löchel (eds.), China’s Changing Banking Industry, Frankfurt School Verlag, Frankfurt am Main, 1st edition 2012; further details at: http://www.frankfurt-school-verlag.de/china

The Editors

• Dr. Horst Löchel is Professor of Economics at Frankfurt School of Finance & Management. Between 2003 and 2011 Professor Löchel occupied a number of teaching and research posts in Shanghai, including a stint as a professor at CEIBS (China Europe International Business School). To date his teaching and research have focused on the Chinese banking sector and its transformation, but he also specialises in the Chinese economy and the global finance and banking sector.
• Dr. Chun Chang is Executive Director of the Shanghai Advanced Institute of Finance and Professor of Finance at Jiao Tong University in Shanghai. He was previously Associate Dean and holder of the ABN AMRO Chair in Risk Management at CEIBS. He was also the first Professor of Finance from the PRC to teach at an American university, working for 17 years as a tenured professor at the University of Minnesota’s Carlson School of Management.

We would be happy to send copies to interested media representatives. Professor Löchel is available for interviews in Frankfurt and Shanghai.

The Essays

1. China’s major state-owned banks, which continue to dominate the Chinese banking sector, are in the process of transforming their business model from a segregated to a full-service banking system based on a holding-company structure. This business model is expected to generate more income from fees and commissions. Behind this shift lies the continuing trend towards liberalisation of the Chinese financial system, which is likely to reduce interest margins – currently the major source of revenue for Chinese banks – to prevailing international levels.
2. During the financial crisis the Chinese banking system’s regulatory architecture demonstrated its superiority to the Western model by limiting high-risk banking transactions and obliging banks to concentrate on their core role as intermediaries in the macroeconomic funding cycle.
3.  A Chinese “shadow banking” system is evolving that is now providing serious competition for the established banks. The development is highlighting the existing system’s weaknesses – apparent in, for example, the funding of private small and medium-sized enterprises in western China. The editors identify indicators suggesting that China’s administration welcomes the growth of this shadow banking system as desirable and innovative competition for the established banks.
4. The entire Chinese financial system is becoming globalised. The Chinese government’s resolution to transform Shanghai into an international financial centre by 2020 is serving as the blueprint. Other initiatives include the accelerated internationalisation of the Chinese yuan as a trading currency, the expansion of Hong Kong as an offshore market and the rising level of international investment by Chinese banks.
5. Increasingly, China is acting as a global player on the international financial markets. A symptom of this involvement is the growing number of Chinese occupying senior international financial posts, such as Zhu Min (Deputy Managing Director of the International Monetary Fund) and Justin Yifu Lin (Chief Economist at the World Bank).
6. The Chinese banking market is well on the way to becoming the largest banking market in the world. Any bank hoping to become a global player must have a presence in China. In principle, foreign institutions can conduct the same business as their domestic competitors, although they must first set up an independent Chinese subsidiary to do so – following the example of Deutsche Bank. In practice, however, foreign financial services providers must still overcome a variety of obstacles. Even so, foreign institutions are experiencing much livelier growth in China than they are in other parts of the world.