Formidable Growth of Chinese Banks

China is advancing as a financial powerhouse based on its rapid economic growth.

According to the most recent edition (July 8) of the Yazhou Zhoukan, a survey on the top 300 banks conducted every year among 13 Asian countries revealed that three out of the top five came from China.

China is already a manufacturing powerhouse based on its economic growth of over 10 percent every year. Following that, China is showing both quantitative and qualitative growth in the financial field. China is without question an emerging economic powerhouse.

Top Banks Challenging Japan’s Hegemony–

Of the top 300 banks in Asia selected by Yazhou Zhoukan (based on total assets), 26 came from China, ranking 3rd after Japan (126) and Taiwan (34).

However, three of the top five banks are Chinese. Last year, the ICBC that ranked 2nd after the Sumitomo Mitsui Banking Corporation has assets worth 938.6 billion dollars, close behind the Bank of Tokyo-Mitsubishi UFJ (1.2089 trillion dollars). In the financial sector, mergers and acquisitions are actively underway, so analysts view that it is a matter of time before a Chinese bank takes the top position.

The growth rate of net assets and net profits of Chinese banks was 18.1 percent and 27.6 percent year-on-year, respectively. By contrast, it was –0.7 percent and –4.7 percent for their Japanese counterparts, respectively.

Background of the Rapid Growth for Banks –

The banking industry is rapidly growing within the Chinese financial sector thanks to the increases in demand of banking services mostly resulting from rapid economic growth and flourishing investment. By contrast, insurance and securities industries are in their infant stage.

The economic growth rate of China was 10.2 percent in 2005 and 10.7 percent in 2006. Following that, in the first quarter this year, China is continuously enjoying rapid high growth of 11.1 percent.

Unlike western countries where the securities market directly procures capital from investors, in China, over 80 to 90 percent of the capital needed for investment by a company is procured from indirect financing via a bank. The procurement rate via a bank in the western world is around 30 percent.

The big difference in interest for deposits and loans is providing stable earnings to banks.

Currently, the annual interest rate in China is 3.06 percent for deposits and 6.57 percent for loans, making the difference in interest 3.51 percentage points. Meanwhile, Korea’s average annual deposit and loan interest rates are 6.79 percent and 3.85 percent, respectively, a difference of about 2.94 percent.

Chinese banks are exploring new domains by developing various derivatives, expanding export financing, and actively advancing into the overseas market.

Industrial and Commercial Bank of China Opening a New Chapter in the History of Chinese Banks –

The Industrial and Commercial Bank of China (ICBC) collected 21.9 billion dollars by listing itself on the securities market of Hong Kong and the mainland in October last year.

It dazzled the world with the biggest Initial Public Offering (IPO) ever in the international financial sector. The total assets of the bank rank 2nd in Asia, but its annual net profits were six billion dollars, ranking first.

The bank has 17,000 branches inside China and 100 abroad, including Korea.

It is the number one bank among banks in China in most categories, including issuance of credit cards (16 million), deposits, and loans. The number of individual customers it has is about 180 million, and it has 2.5 million corporate customers. Its slogan, “a reliable bank right next to you,” implies its pride in its vast number of branches throughout China.

Jiang Jianqing, the ICBC chairman, said, “For the next three years, 3,000 branches, 1,000 every year, will be converted into VIP branches, and 200 will become “private banks” to boost service quality for loyal customers.”

bonhong@donga.com