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Financial firms need to go global

Updated: 2011-05-20 10:34

By Li Zhongmin (China Daily European Weekly)

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Financial firms need to go global

It goes without saying: Globalization of the Chinese financial industry is key to the globalization of China's enterprises. If China doesn't have a sound financial industry, there's no way its industries will expand overseas.

In the early 2000s, only Chinese commercial banks were making headway in their overseas expansion plans, but after 2009, overseas investments from throughout China began picking up.

Overseas direct investment (ODI) from China is that in 2007, ODI was $1.67 billion (1.17 billion euros). The figure reached $8.73 billion in 2009.

There are three main reasons for the sharp growth. The demand caused by ODI from nonfinancial industries. To meet the demand of nonfinancial enterprises, Chinese commercial banks and other financial institutions sped up outbound development.

Second, China Investment Corporation, in 2009, increased investments in the midst of the financial crisis. The total investment amount reportedly reached $6.54 billion in 2009.

Third, the financial crisis made some financial assets undervalued. Some financial institutions then sold their Asian assets selectively, which provided a great opportunity for Chinese financial institutions to swoop in on inexpensive prices and plan their global expansions.

Thus far, there have been losses and gains in China's overseas investments from its financial industry, which didn't take advantage of the crisis. Fortunately, the potential for overseas investments is still great. If the financial industry speeds up its plans for overseas investments, it would lay a solid foundation for China's improving global competitiveness.

As the Chinese financial industry transitions into globalization, various financial institutions need to apply for licenses to conduct commercial banking, asset management and private banking. But the more important task for Chinese financial institutions is to enhance their service capacity for Chinese enterprises overseas.

Right now, there are many favorable conditions for outbound investment of Chinese financial institutions.

Chinese financial institutions already have a foothold overseas. The proportion of overseas assets and revenue has increased steadily. More and more commercial banks have adopted the practice of mergers and acquisitions (M&As) as the major way of outbound investment.

The financial crisis provided the best investment opportunity for China. The US subprime mortgage crisis and the European sovereign debt crisis severely broke the financial system and institutions of the West. But the bad thing is that Chinese financial institutions barely grabbed onto the opportunities at their feet. In 2008 and 2009, when the crisis was the severest, M&As sharply declined from a peak in 2007, with figures of $2.5 billion and $1.29 billion, respectively.

This shows that after the global economic collapse, Chinese financial institutions made inaccurate judgments and underestimated the stimulus measures of other nations' central banks (especially the US Federal Reserve). Chinese financial institutions also did not fully understand the influences of the financial crisis. The economic recession had a limited impact on most of Asia. Some countries, such as Japan, made full use of the crisis and increased their overseas M&As.

Fortunately, judging from the current financial market and economy in Western countries, excessive liquidity will not save their weak economies and financial industries. High unemployment rate and low revenue indicate that the effects brought by the financial crisis will not disappear in the short term. The pressure on Western commercial banks will not be reduced until 2019. That is to say, during this time, many M&A opportunities will still be there for Chinese financial institutions.

The globalization of nonfinancial industries has created new demand for financial industries. According