June 28, 2010. As the U.S. Congress prepares to vote on the financial-overhaul bill, China’s financial regulators and top executives gathered over the weekend to celebrate the success of the country’s economic model and call for greater international engagement.
“Since the crisis, China has seen its status in the international financial system rise. China’s banks should take a bigger role in international markets,” Niu Ximing, president of Bank of Communications Co., China’s fifth-largest bank by assets, told the annual Lujiazui Forum.
“We shouldn’t just set up branches overseas, but also explore M&A. Two approaches should be combined,” he said.
In contrast to their U.S. counterparts, China’s financial institutions emerged from the financial crisis largely unscathed, largely due to their limited exposure to overseas markets and a hands-on regulatory regime that allows only gradual innovation.
With China now boasting some of the largest and best capitalized banks in the world, the clear message from the country’s finance-sector leaders was that financial services need to play a greater role in the economy and that financial institutions should further expand overseas.
China Life Insurance Co. President Yang Chao warned of the challenges facing Chinese companies moving overseas, such as cultural differences and finding the expertise to make M&A work. But his overall message was that the time is ripe for Chinese investment abroad.
“We’re optimistic about China’s firms going global,” he told the forum, named for Shanghai’s towering financial district. “But we need government support to streamline procedures and approvals to help efficiency. Market conditions are always changing, and if we wait too long we might lose the opportunity.”
Although Beijing some years ago launched a “go out” policy to encourage Chinese firms to expand overseas, state-owned companies in particular face significant scrutiny for any M&A deal as Chinese regulators try to ensure state assets aren’t squandered. Foreign private-equity companies, in particular, complain that one of the difficulties in pairing up with Chinese firms is that investment opportunities may pass while they await Beijing’s green light.
Expectations during the early days of the financial crisis that cashed-up Chinese banks might step in to bail out struggling Western financial institutions never materialized. Instead, Chinese banks have begun making investments in smaller counterparts in developing countries, suggesting a more gradual and strategic approach toward making inroads into markets where the lack of sophistication of Chinese lenders relative to Western standards is less of an impediment.
For their part, China’s regulators expressed a greater willingness to help redefine the global financial framework.
People’s Bank of China Deputy Gov. Yi Gang, speaking on behalf of Gov. Zhou Xiaochuan who was in Canada for the G-20 meeting, said China should take a significant role in setting the “new rules of game” in the global financial market. He didn’t elaborate. But in an interesting caveat, Mr. Yi questioned whether China has the needed soft skills to help lead the process. “Do we have enough talented people to talk to key counterparts on an equal footing in the international environment?” he asked.
Human resources was a recurring theme at the forum as executives highlighted the need to tap Chinese people working in the financial sector overseas to smooth the transition of Chinese firms as they move into international markets. While China’s domestic market has expanded rapidly in recent years, it still lacks the sophistication of more mature economies. In recent years, the Shanghai municipal government has been sending regular hiring delegations to major financial centres around the world to attract home Chinese with risk-management and technical finance skills.
Some foreign commentators warned that despite the relative strength of China’s economy at the moment, the country should guard against over confidence.
“I think there’s a sense among some in China that the Western banking system is flawed and China should change the way it looks at the market economy,” said Peter Mandelson, former EU trade commissioner and until recently U.K. business secretary. “That’s no reason to back away from the liberalizing approach China embarked upon 30 years ago.” He said China’s economic model of state capitalism has its own shortcomings, as evidenced by regular overheating in certain industrial sectors and rising concerns among China’ regulators over bad debt after massive credit expansion last year.
