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Money power

Updated: 2013-04-12 10:08
By Andrew Moody and Hu Haiyan ( China Daily)

 Money power

Martin Jacques, a China commentator, says there are risks for China to take on the mantle of a financial superpower. Nick J.B. Moore / for China Daily

If anyone were to underestimate the potential scale of China's financial firepower, they might better first consider that the sovereign wealth fund CIC has already had a major presence globally by deploying just 1.6 percent of available foreign currency reserves.

Gary Rieschel, founder and managing partner of Qiming Venture Partners, a leading venture capital company, based in Shanghai, says it is not a question of when China becomes a financial superpower because it already is.

"It is a superpower in the sense that anyone in financial services, whatever they are doing, has to take account of China; so in terms of influence they are already there."

But he argues that if China is going to be as dominant in the world as it has been in manufacturing, it will have to overcome major hurdles.

"In the manufactured product world, the trust is in the product. Thirty years ago China did not target being a world class manufacturer and competing with Germany but at just being good enough for the lower cost markets..

"The problem with financial services is that just good enough doesn't work. The trust is in the people and the institutions and not in the product. That is the part that China is going to struggle with."

One of the major questions is whether China can achieve true dominance abroad without banking reform at home.

One key reform would be interest rate liberalization. Interest rates are set centrally by the People's Bank of China and so domestic banks cannot set their own interest rate spreads and compete for funds or even price risk. This has resulted in a lack of effective competition in the domestic banking sector.

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Mike Werner, senior equity analyst at research group Sanford C. Bernstein in Hong Kong, says that without this experience it is often difficult for Chinese banks to compete abroad.

"In China as a private individual, if you think where you are going to put your money, it is either property, equities or deposits. Equities haven't done so well, property has been clamped down on so the banks have this captive audience for deposits.

"If you are in the US or Europe you don't have this captive audience because you are competing against all the other investment alternatives."

Despite this headwind, the Chinese banks have been stepping up their overseas operations.

The overseas assets of ICBC, which acquired 80 percent of Standard Bank's Argentinian assets over the last year, grew by 30.5 percent to $162.7 billion, some 5.8 percent of the group's total assets.

Bank of China's overseas assets (when Hong Kong, Macao and Taiwan operations are added) stood at $483.6 billion last year, an increase of 13 percent on the previous year and some 24.7 percent of its total assets.

The merger-hungry China Construction Bank's $83.6 billion represented a 17 percent increase. Agricultural Bank of China saw the biggest rise in its overseas assets. They soared 92.9 percent to $38.78 billion, 1.8 percent of the group's total.

Ba Shusong, deputy director general at the Development Research Center of the State Council, says Chinese banks began to develop their international operations after China joined the World Trade Organization in 2001 but that this has developed momentum with the government's tight control of credit in the domestic market.

"We have witnessed many mergers and acquisitions outside China by (the Big Four) banks and there must be more in the future, since making acquisitions is a much more effective way for them to expand their international business than building up branches from scratch," he says.

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