Chinese banks under scrutiny for opaque interconnectedness of financial firms
Jun 22, 2022
Washington [US], June 22 : The resilience of the Chinese banking system has come under scrutiny in recent years as there are indications that Beijing wants more control over its economy.
Pia Sherman, writing in Global Strat View said that the scrutiny of Chinese banks pertains to individual characteristics such as concentration, rapid asset growth, the importance of shadow banking, the opaque interconnectedness of financial firms, and Chinese banks' increased international clout.
Recent reports indicate that Credit Suisse Group is slowing its expansion in China. Credit Suisse has postponed the launch of its locally incorporated bank until 2024, allowing it to expand its wealth management bank.
Among the COVID-19 lockdowns and increased regulation, the firm's management cited China's slowing economy. Credit Suisse is also awaiting an on-site inspection from regulators before it can expand on the mainland, said Sherman.
Because well-known local and entrenched banks control the majority of the market share and are used as channels for government policy implementation, China is a notoriously difficult place for foreign banks to compete successfully.
Minimum asset thresholds and ownership requirements have long constrained foreign banks, and they continue to be constrained by capital account restrictions. A 2021 regulation, for example, restricted global banks' ability to raise money abroad and transfer it to China.
In 2022, regulators warned foreign banks not to overpay their executives. Furthermore, according to Bloomberg, tensions between China and the United States have significantly delayed banking licenses. This includes licenses desired by Morgan Stanley to expand on the mainland.
Due to difficulties obtaining low-cost deposits as major funding sources, foreign banks have faced higher funding costs than their domestic counterparts. Foreign banks also have a higher loan loss coverage ratio than domestic banks because they have fewer outlets for nonperforming loans, reported Global Strat View.
Foreign banks continue to pursue business in foreign currency lending, trade financing, and investment banking, including derivatives trading and asset management. However, they run the risk of China's regulatory changes imposing additional requirements on their core businesses.
New regulations are frequently introduced quickly and can aggressively curtail activities deemed unstable, unequal, or otherwise unpalatable by the Communist Party.
Foreign banks are also concerned about government intervention in the economy. The flurry of regulations enacted in 2020 and 2021 demonstrated Beijing's ability to crack down on what it considers unacceptable behaviour but equally troubling has been government influence on China's equity markets via government guidance funds in favoured industries.
These actions demonstrate the Chinese government's authority in determining which industries will thrive and how they will be funded.
