China's big state-owned banks have reaped large profits from the country's economic miracle and are now beginning to make a splash internationally.
As befits a major sector in the world's most dynamic economy, 17 listed mainland banks maintained profit growth in 2011, making a total of $140.2 billion, a 29 percent increase from the previous year, according to a report from Ernst and Young in Hong Kong.
The two biggest banks in the world by market cap are the Industrial and Commercial Bank of China (ICBC), which has roughly $250 billion in capitalization, and China Construction Bank -- with the Agricultural Bank of China in fifth place. America's Wells Fargo and the UK's HSBC come in at third and fourth largest respectively.
China's banks are starting to flex some of their financial muscle internationally. In May, the Federal Reserve gave ICBC approval to buy the US subsidiary of Hong Kong-based Bank of East Asia, marking the first time a Chinese bank has been cleared to take over a US bank and the start of a push by Chinese banks into the US market. According to the Fitch ratings agency, US banks that cater to Asian-Americans are the likeliest takeover targets.
Meanwhile, the banks are also making moves in emerging markets. The Export-Import Bank of China lent more money to sub-Saharan Africa than the World Bank between 2001 and 2010, with Africa accounting for about 20 percent of EXIM's loans, according to Fitch. The absence of political strings, more competitive interest rates, and flexible repayment schedules make China's loans look highly attractive when compared with loans from Western sources.
However, Ernst & Young struck a note of caution, saying the slowing Chinese economy will require the banks to make a shift in their business philosophy. That forecast has been validated by recent government signals for an increased role for the private sector in the largely state-controlled banking system.
Last month, the Chinese government announced it would open its banks to private capital in an attempt to counter the slowdown by lending more to private firms. Private sector critics have long accused the banks of preferential lending to big, state-owned enterprises (SOEs) rather than to China's dynamic, but relatively small, private sector--so this was a shift welcomed by many.As the global economy slows and the Euro crisis continues to grind on, pressure on China's banks to reform will only increase. For American investors, that might not be such a bad thing. Successful reforms at home will only accelerate their metamorphosis form largely domestic entities into vast institutions straddling the globe -- and increasingly reliant on foreign investor partners for its financial success.