Economy, Special Situations

Expanding Global Footprint Exposes Chinese Banks To Greater Risk

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Chinese banks are becoming increasingly important players in the global economy. But by doing so they have greatly increased their exposure to global financial risk. It also means China will have to play a larger, more challenging role in the event of future economic upheaval.

That’s the finding of a report issued by the Bank of International Settlement (“BIS”) on Sunday. The BIS, an organization representing central banks around the world, said Chinese banks had cross-border financial assets worth about US$2 trillion as of the third quarter of 2017.

The BIS noted that Chinese banks are the sixth largest group of international creditors worldwide, with their global footprint encompassing not only emerging market economies, but also advanced economies and offshore centers worldwide. It also said  that because Chinese banks lend abroad largely in U.S. dollars, in absolute terms they are now the third-largest provider of U.S. dollars to the international banking system.

“Chinese banks have a sizable and growing global footprint,” said the BIS. “In the face of future shocks at home or abroad, they are likely to take their turn as important common lenders.”

Being a common lender means that several countries borrow from a few big international banks, increasing the risk that losses in one country will prompt banks to pull money out of other borrower countries, thus adding to financial instability worldwide.

"Unexpected losses in one country may induce banks to withdraw from other borrower countries as banks restructure their asset portfolio in an attempt to rebalance overall risks and satisfy regulatory constraints," BIS stated. "Contagious spillovers can thereby spread the turmoil around the globe."

Prior to the Asia financial crisis of 1998, Japanese banks were the common lender to Asia. Following that crisis Japanese banks were forced to reduce their exposure to the region, being replaced largely by U.K. and E.U. banks. By 2008, banks from the E.U. and the U.K. jointly held almost 50% of the international consolidated claims on Indonesia, Korea, Malaysia, the Philippines and Thailand, while Japanese banks accounted for only 15%.

Following the 2008 financial crisis, those banks were in turn forced to retreat, opening the field to both Japanese and increasingly Chinese banks.


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