A historic turning point was reached in Chinese economic development in 2014, when the nation's direct foreign investments surpassed foreign countries' direct investments in China. As well-known scholar Deng Ning acknowledged, when a country's GDP exceeds $4,750 per head, direct foreign investments and foreign countries' direct investments will reach equilibrium. Once it reaches this level, outbound investments should exceed the inbound. He did not include China when carrying out this statistic analysis. But the country's GDP has now surpassed $6,000 per head, which could be a healthy sign.
However, China should better develop its direct foreign investment, rather than purchasing foreign countries' national debts via huge foreign-exchange reserves. Many entrepreneurs, including private enterprises, are increasingly adept at using the imbalance between global supply and demand to develop business. Accordingly, we see more Chinese enterprises carrying out overseas mergers and acquisitions than previously, while also establishing factories and stores abroad.
China is currently living through a truly great epoch. With many companies bringing more business to China's international banks, ICBC has now set up more than 330 branches in 40 countries, with total overseas assets of $250 billion and expected overseas profits of $3 billion this year. If we rank all big banks around the world, these overseas profits would rank around seventieth to eightieth, exceeding many big foreign banks' total profits.
As can be seen from this process, the development of global financial international banks has a very clear context. 100 years ago, its development was accompanied by the rise and development of capitalism and colonialism to a large extent.
After the First and Second World Wars, the global financial centre began to move to America. After the 1980s, Japan developed rapidly because of positive demographics and innovative reform. From the 1990s to the 2000s, Japan entered a phase of stagnation. Then US banks again developed quickly because of the growth of the technology sector and European banks because of the birth of the euro. After the 2007/2008 financial crisis, the European and US banking industry was affected on a large scale, but Chinese industry achieved rapid development through various drivers such as positive demographics, economic reform and foreign trade. China's major banks completed joint-stock system reform and rapidly improved their profitability and market competitiveness, becoming strong competitors on the global financial market.
A strategy of steady development is crucial, which Chinese banks and firms should acknowledge and value
Lessons to be learned
Several guidelines for banks' international management can be gathered from the past century's development.
First, transnational banks are usually closely connected to the domestic economy and coexist with the latter's own globalisation process. The size and strength of global major banks are always matched by their domestic economy. And their competitiveness in the international market is also compatible with their international influence.
Therefore, the Chinese banking industry's size within the global banking industry is huge at the moment, with an increasingly rapid pace of transnational management and stronger global competitiveness, which is completely consistent with the pace of Chinese economic development. Many Chinese companies' ventures abroad match this process, banks included. The first reason is demand, followed by capability - that is, when financial capability and managerial capability have developed to a certain stage. If China's internationalisation had been brought forward by 20 years, then there would have been many failures. So the current internationalisation just matches economic development exactly.
Second, as can be seen from the process of banks' internationalisation, a diversified regional structure would improve risk-avoidance capabilities, as the economy is highly related to finance, and there is usually a convergence between economic performance and economic cycles. Regional diversified international management could, however, help deal with domestic economic fluctuations. Major commercial banks and multinational companies that have been active in the global financial markets for the past century have businesses in many countries and regions around the world that can help to insulate them against periodic fluctuations.
Third, a strategy of steady development is crucial, which Chinese banks and firms should acknowledge and value during the current fast pace of transnational management. Major multinational corporations and banks in the world all realised their development after going through tens or sometimes even hundreds of mergers. An economics Nobel laureate once said that there is no American giant company that did not develop and become strong via merger. Nevertheless, nearly no major company in China has developed in this way - most have undergone endogenous development. It is not until now that some companies have begun to carry out global mergers and acquisitions. Because of their lack of experience, Chinese companies should pay special attention regarding risk prevention, establishing various strategies adapted to the market environment and resource endowment, rather than slavishly imitating others and losing direction. Many banks have lost hugely during their international development, even becoming impoverished. Out of the 20 biggest banks in the world in 1913, there are only five banks today that have not been acquired and absorbed, or gone broke, with 75% of them having declared bankruptcy. This shows the importance of steady development.
There are some new conditions that banks need to be cognisant of regarding the international development process. As financial protectionism continues, strict regulatory controls have increased the difficulty of carrying out overseas mergers. Moreover, regulatory institutions apply different criteria on domestically funded institutions compared with foreign-funded institutions. There are also even stricter requirements on foreign-funded institutions with respect to market access, business practices, personnel structure, profitability requirements and consumer protection.
With differences in supervisory rules among various countries and managerial regulatory independence of financial institutions in different regions increasing, the operational difficulty of integration for commercial and international banks becomes even larger.
During the process of banks' internationalisation, conglomerates are facing a decentralisation trend - namely, every country has its own requirement to regulate branches independently, and that also promotes the decentralisation trend. These phenomena should be highly concerning. Positive as the overall situation of Chinese banks' international management is - 18 domestically funded banks set up 1,127 foreign-funded institutions overseas in 51 countries and regions, with more than $1.2 trillion of total assets up to the end of last year - Chinese banks still face countless
challenges in international management.
The range of network topology remains small - management depth still needs to be expanded. Many institutions are inadequate in their service range, weak in their customer base, and their comprehensive service standards still need to be improved, which might have something to do with the parent commercial banks' insufficient international management.
Compliance risk and risk control are also challenges. With new international regulatory criteria made increasingly strict and the increase in the size, types and complexity of domestically funded banks across the world, banks can face even harsher regulations and challenges, such as country risks, legal risks and reputational risks. Some European banks have received huge fines in the US recently, which is a lesson we can draw from others' mistakes.
There are multidimensional obstacles in cultural integration: we should not only overcome the barrier of lowered operational efficiencies caused by language differences, but also be aware of apparent differences between Chinese and foreign ways of thinking. For instance, there are differences of opinion on subjects like a sense of hierarchy and working overtime between expatriates and local employees. Because there are large differences between Chinese and foreign employees regarding politics, culture, customs, religion, labour and law, we should pay a great deal of attention to cultural inclusiveness.
It is important to emphasise improvements in institutions and mechanisms. For example, with respect to operational systems, many institutions do not have sufficiently large scale in their offshore institutions. The first challenge is to improve service efficiency and standards to create economic scale. With respect to technological support, huge challenges remain for multinational companies managing their groups and for the global management of technological platforms.
Some of the expectations for the international development of China's banks include:
- ?First: always serve the globalisation of the Chinese economy. China's banks went global first, which has created a vital platform for domestically funded businesses to develop in the international markets. Many of these firms are not familiar with conditions like local laws and labour traditions when they first move into a new, foreign environment. However, their worries are lessened if they have a China-funded bank as a partner. Additionally, Chinese banks would get increased business if China-funded businesses ventured abroad more. Banks are enjoying rapid development in international business now, with tremendous business opportunities derived from the internationalisation of the renminbi. In our $250 billion of total overseas business assets, more than 20% of the assets and businesses and nearly 30% of the profits are from overseas renminbi business. For some overseas branches in particular, 60% of their profits come from overseas renminbi business. Consequently, with future overseas renminbi business growing in scale, renminbi internationalisation will increase, creating new opportunities for the internationalisation of China-funded banks.
- ?Second: localise business development. Setting up overseas branches is not the core of constructing multinational banks. Overseas banks should stick to the principle of equality, mutual benefit and win-win results, realising sustainable, localised and mainstream development. Meanwhile, they should actively participate in the economic construction of their host countries, promoting local economic development, and improve living standards and employment.
- ?Third: always strive to establish a world-class product line. When developing overseas, we cannot simply copy the product from China into other countries, as it doesn't usually fit internationally. ICBC is concentrating on some business fields and breaking new ground in markets, in order to form strong market service capabilities. For example, it is putting its efforts into - among other fields - the promotion of global cash management, trusteeship, capital management, precious metals, investment banking and leasing businesses. In several product lines like trade, capital-raising and gross settlement, we should form global product lines that will be hugely competitive.
- ?Fourth: corporation management and risk management should always be the priority. In the construction of transnational banks, we should strictly follow the regulatory requirements of the international banking industry, improve overseas corporation management according to law and rules, fully realise the political risks, compliance risks, market risks, credit risks, reputational risks in multinational management; and enhance the predictive capacity and scientific methods of risk prevention, to ensure capital security for banks.
Integration is key
Last: always persist in constructing an integrated group managerial mechanism. China's transnational banks' overseas institutions must take advantage of their own strength in building an integrated mechanism for internal and external interactions and coordinated development. In addition, strengthen the training of global staff and reinforce the cohesion of global employees' groups.
This is a perfect time for China's development. With the country rapidly opening up, with transnational banks and companies helping each other forward, a bright future surely awaits us.