The most successful Chinese leaders are those who keep the country unified and united. History tells us that when the Middle Kingdom’s centre fails to hold, crisis soon looms large. This is not a country adept at bumbling through.
Yet in recent years signs have emerged of a two-speed China.
The first of these faces inward and lacks momentum, direction and confidence. This is the China of stodgy economic growth and tumbling house prices, not to mention signs of growing social discontent. GDP grew by 4.7% year on year in the second quarter of 2024, lower than expected, undermined by disappointing retail data. In a July 15 research note, Deutsche Bank’s chief investment office called the consumption outlook “bleak”.
But the outward facing story is very different.
Exports rose 8.6% year on year in June, with China’s monthly trade surplus hitting a record high of $99 billion. Much of that growth is dominated by photovoltaic solar panels, lithium batteries and electric vehicles – three high-value, supposedly future-proofed industries at the heart of Xi’s drive to rebalance the economy and turn it into a technology superpower.
His efforts seem to be working for now. You can’t go far in southeast Asia without spotting adverts for EVs made by the likes of BYD or Great Wall Motor. China’s carmakers are embedding themselves in Latin America and the Middle East, offering prices that undercut Japanese and German rivals.
Bloomberg Economics tips China’s high-tech sector to account for 19% of GDP by 2026, against 11% in 2018, even as the property sector shrinks by a third.
For the mainland’s big banks, this presents an opportunity and a quandary. On the one hand, many of the world’s most innovative and ambitious corporates are Chinese by name, nature and ownership. Banking them as their founders/CEOs bounce around the world, setting up factories in Bangkok, Bogota or Bengaluru, should be easy and profitable.
The problem is that many of those banks have little international presence. All the market’s big lenders look and feel roughly the same. They carry out the government’s bidding by shovelling capital into the maw of state-owned enterprises, while scrimping on digital innovation and lending to small and medium-sized enterprises. Almost everything they do is local. If any one of these outfits has an actionable working plan to expand overseas, it isn’t immediately obvious.
Almost everything China's big banks do is local. If any one of these outfits has an actionable working plan to expand overseas, it isn’t immediately obvious
And herein lies the rub. Last week, BYD agreed a $1 billion deal to build a manufacturing plant in Turkey. The Tesla rival simultaneously opened a new plant in Thailand and has plans to build car-making facilities in Hungary and Mexico.
At home, BYD would surely choose to bank with a big state player – an ICBC perhaps, or a China Merchants Bank. Either might fund its working-capital needs in those markets, but when it comes to providing, say, foreign-exchange or cash-management solutions, or advice on how to engage with local regulators, that is when foreign lenders come to the fore.
Big banks in other exporting countries – think of the UK and Germany, the US and Japan – profit by following their clients abroad. So far at least, China’s banks are not going down that route. To date, the only large external acquisition by a Chinese lender was ICBC buying a 20% stake of South Africa’s Standard Bank – and that was 17 years ago.
That must change. Xi’s great rebalancing is, in reality, a one-trick pony involving making a lot of high-tech equipment for use in a low-carbon world. Increasingly, those goods are not only sold overseas but made there too, by companies who need world-class financial services and advice at the point of production, in the likes of São Paulo, Lagos and Jakarta.
China’s banks can ably perform none of those duties today. They face two choices. Either they can continue to focus almost wholly on internal matters, serving clients in an economy encumbered by rising debt, weak demand and an embattled property sector.
Or they could widen their gaze to meet the external needs of the nation’s new corporate superstars, whether by opening new overseas branches, buying in or training up talent, or snapping up stakes in foreign lenders. Or all of the above.
Of course, that requires courage, determination of purpose and a clear plan of attack – attributes that none of the big onshore lenders have ever been much blessed with, yet that they need, in an increasingly global Chinese world, now more than ever.
