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China's banks are leading globalisation charge, McKinsey says

[HONG KONG] Banks from China, Japan and Canada have overseen a surge in overseas lending since the financial crisis, helping to cushion a deep slide in cross-border capital flows thanks especially to a retreat by European banks, according to the McKinsey Global Institute.

While the stock of global foreign holdings - including loans, equities, bonds and foreign direct investment - has remained about the same since 2007 at 183 per cent of world GDP, gross flows of capital across borders have plunged 65 per cent.

Much of that has been due to European banks refocusing on their domestic markets as the euro crisis and new capital rules took hold, McKinsey said in a study on financial globalisation.

Key exceptions have been banks in China and Japan, which have funded their countries' companies abroad and, in Japan's case, sought to escape low margins and scant lending opportunities at home.

Canadian banks are another outlier, having expanded their overseas operations mainly in the US.

"China's leading banks demonstrated the largest relative increase in the share of foreign assets," the McKinsey study said. 

The country "is gaining prominence in the global financial system," ranking eighth in total foreign investment assets and liabilities in 2016, up from 16th in 2005.

"It has significant room to further expand foreign investment."

Among the data on China, the McKinsey study dated last month found: Chinese banks' stock of foreign assets climbed to 9 per cent of their total by last year, from two per cent in 2007, and exceeded US$1 trillion by the end of 2016.

China's value of total foreign assets and liabilities is equal to 101 per cent of gross domestic product, well below the 350 per cent average across advanced economies and also less than emerging markets including Brazil, Mexico and Russia.

Bank lending tends to be among the most volatile of flows, and its declining share of global cross-border capital has contributed to a greater level of stability, according to the analysis by McKinsey researchers including Washington-based Susan Lund.

A majority of cross-border investment is now in FDI and stocks, the group concluded.

"The financial system is more stable, but risks remain," the researchers warned. 

"Capital flows - particularly foreign lending - remain volatile. Over 60 per cent of countries experience a large decline, surge, or reversal in foreign lending each year, creating volatility in exchange rates and economies."

The researchers flagged the "possibility that high equity values may manifest eventually as an unsustainable bubble."

World stock-market capitalisation increased to 99 per cent of GDP by last year, from 67 per cent in 2011. 

McKinsey also cautioned that the growth of international financial hubs - defined as locations with foreign-investment assets and liabilities totaling more than 10 times their GDP, "may pose some risks," given transparency challenges in some centers.

High levels of leverage "could be hidden" and "pose a systemic risk," McKinsey said.

The following are other highlights of data from the report: The total value of cross-border investment was US$132 trillion in 2016.

Gross cross-border capital flows sank to US$4.3 trillion in 2016 from US$12.4 trillion in 2007.

For the first time in a decade, developing countries as a group are net recipients of capital Since 2007, 69 per cent of capital flows have come from FDI and equities, up from 36 per cent from 2000-07.

The global stock of FDI has increased by US$16 trillion since 2007, with almost 45 per cent of that due to funds pouring into financial hubs such as Singapore and the Netherlands Part of the FDI to these hubs is in the form of special purpose entities that are essentially conduits for investing in other assets.

About 27 per cent of global equities are owned by foreign investors, up from 17 per cent in 2000;  Some 31 per cent percent of bonds are held by foreign investors, up from 18 per cent in 2000.

Advanced economies saw little change in bond ownership over the past decade, while the share in developing nations has jumped. Cross-border debt purchases have fallen to US$700 billion from US$2.8 trillion in 2007, prompted in part by China and others buying less for their currency reserves.