Chinese banks face greater risks in cross-border lending

IN mid-2021, cross-border lending of Chinese-owned banks totalled US$2.66 trillion and made up 4.7 per cent of their balance sheet. In comparison, US banks' cross-border lending made up 22.5 per cent of their balance sheet at US$4.35 trillion, according to the Bank for International Settlements' (BIS) Locational Banking Statistics. However, various factors point to greater risks for Chinese banks at present.

First, their lending is mainly to emerging markets and developing countries (EMDC). They lend to 133 out of a total of 143 and China is the main trading partner of 63. Second, Chinese banks' lending is 60 per cent in the dollar, whereas their cross-border liabilities are only 45 per cent. They are running a currency mismatch similar to Japanese and European banks. However, with the yuan appreciating against the dollar, Chinese banks are long in a weak currency and short in a strong currency.

Chinese banks face the cumulation of greater credit and market risk. Many EMDC have been struggling in the post-pandemic period. A combination of a strong yuan and signs of tapering on the horizon would require greater regulatory and supervisory scrutiny of Chinese globally systemically important banks by Chinese banking regulators, such as the China Banking and Insurance Regulatory Commission. The Financial Stability Board lists 4 major Chinese banks on their watchlist of G-SIBs which could adversely impact global financial stability.