As debt burdens inside China rise, the country's banks are ramping up cross-border lending.


Author: Jonathan Rogers

Chinese banks are expanding their foreign-lending business, in stark contrast to European and American banks, which have been reducing their cross-border balance sheet exposure.

This expansion isn’t without risk, from a credit perspective. But it reflects the pressing need for Chinese banks to diversify their balance sheets in the face of fully utilized credit lines at home. A hefty RMB12.6 trillion ($1.8 trillion) of loans were extended by China’s banks last year, prodded by financial authorities’ encouragement of credit-fueled stimuli. Three of China’s “big four” banks registered a higher rate of growth for overseas loans than for domestic loans for the first time.

That dynamic must be viewed in the context of China’s dangerous debt mountain. Corporate debt is estimated at 175% of the country’s GDP, having ballooned from around 100% just over a decade ago. Now faced with a raft of nonperforming loans, China’s banks have been looking to diversify their balance sheets with exposure overseas.


Amit Lakhwani
Lakhwani, Standard Chartered: Recently we have seen Chinese banks display increasing ambitions to grow their international presence.

The growth in foreign lending is also being driven by Chinese authorities’ policy of “going global”—encouraging overseas expansion by Chinese companies—as well as the New Silk Road, or One Belt, One Road initiative (OBOR). OBOR, president Xi Jinping’s brainchild, proposes trillions of dollars of spending on infrastructure in more than 60 countries along the ancient route connecting China with the West.

Last year, ICBC, China Construction Bank and Bank of China saw their overseas-loan books grow by 22%, 31% and 11%, respectively, with loans extended outside China increasing by an average of RMB200 billion for each bank.

Further down China’s banking food chain, smaller commercial banks also saw substantial gains in their foreign-loan books. Joint-stock commercial banks China Merchants Bank and China Everbright saw their overseas-loan books surge by 72% and 81%, respectively, last year.

“Chinese banks have become much more active players in the Asia-Pacific loan markets over the past year, with many of them dominating the syndicated-loan league tables and having made notable strides over the past few years,” says John Corrin, global head of loan syndication at ANZ in Hong Kong. Standouts include Bank of China, ICBC and China Construction Bank.


This growth emerges in contrast to the status quo in Europe’s banking industry, where 2016 was marked by shrinking revenue, rising loan loss provisions, deleveraging and a collapse of almost 50% in net income. Interest income shrank by around 7% on the back of declines in money-market rates in the eurozone, reflecting reduced lending activity, while fee- and commission-based income failed to plug the revenue gap. At the same time, large global banks such as Citigroup and HSBC have been reducing their global lending footprints to focus on higher-margin businesses. For them, contraction has been the modus operandi lately, whereas for the Chinese banks it is about expansion.

“Chinese banks have historically been active in supporting the international funding requirements of Chinese corporates,” says Amit Lakhwani, head of loan syndicate and distribution at Standard Chartered in Hong Kong. “Recently, however, we have seen these banks display increasing ambitions to grow their international presence and take a leadership role in transactions for a broader universe of international borrowers.”

A clear standout in terms of overseas growth in China’s banking industry is Bank of China, where over the past three years overseas assets and loans have grown by around 50%, representing  growth in the proportion of overseas loans to 23% from 19% over the period. By the end of last year, the bank had lent around $60 billion to OBOR projects, and it aims to hit the $100 billion mark by the end of 2017.

“The leap by Chinese banks gives you some idea of the ramping up of cross-border lending activity from a level of relative inactivity in the recent past, where much of the business was focused domestically or in Hong Kong,” says Corrin.

Bank of China is a conspicuous example: The bank has an explicit long-term target of growing the proportion contributed to its post-tax profits from overseas operations from last year’s 30% to 40%.

“OBOR is a welcome and potentially significant development for the loan markets,” says Lakhwani. “We expect it to bring about financing opportunities for both Chinese banks and international lenders to fund the projects and infrastructure being developed under the New Silk Road.”

League tables for Asia-Pacific tell the story of China’s outward banking push. Again, Bank of China provides a good illustration. In just one country, Australia, BoC jumped to No. 6 in the league tables for syndicated lending, from 17th position last year. 

“What indicates resolve with regard to mobilizing balance sheets for cross-border lending is the establishment of global loan syndication desks at the foreign branches of Chinese banks,” says Corrin.

There has been a surge in staffing numbers on loan-syndication desks at major business centers where Chinese banks concentrate their overseas-lending activity, such as London, New York and Sydney.

 “For now, the modus operandi has been for Chinese banks to lend to investment-grade companies, and they have not yet ventured into highly structured or low-grade lending,” Corrin says. “They have not yet figured as prominent lead arrangers for international companies, with which they lack the depth of connections they have with Chinese companies.”

Still, some of the overseas lending activity is regarded with a degree of skepticism by China’s financial regulators. Guo Shuqing, chairman of the China Banking Regulatory Commission, cautioned in April of the risks when China’s banks lend to emerging economies with volatile exchange rates. Chinese bankers also express concern about potential costs to reputation from investigations—some perhaps politically motivated—that could be launched by overseas regulators.