Banking across borders: Are Chinese banks different?

Updated version published in the Journal of Banking and Finance

Summary

Focus

This paper studies the global footprint of Chinese banks, and compares it with that of other major bank nationalities. Chinese banks account for 24% of all cross-border lending to borrowers in emerging market and developing economies (EMDEs), more than double that of Japanese banks, the closest competitor. Further, almost half of all EMDE borrowers rely on Chinese banks as their most important lender.

Contribution

Our paper makes three main contributions. First, it supports the need to follow a nationality approach in the analysis of global business operations, as international banks, and Chinese banks in particular, provide a substantial share of their cross-border lending from abroad. Second, it presents a new distance measure between borrowers and lenders that takes the global network of affiliates into account. Third, it contributes to a better understanding of China's role as a lender in international markets, in particular to EMDE borrowers.

Findings

Chinese banks have become the largest cross-border creditors for EMDEs. Their global reach resembles that of banks from advanced economies (AEs), with greater distances deterring their cross-border lending to EMDE borrowers relatively more than that to AEs. Conversely, Chinese banks' lending to EMDEs is deterred less by longer distances than that of their peer EMDE banks. Further, Chinese banks lend more to those EMDE borrowers with which strong bilateral trade relationships exist and, unlike other banks, they lend less to countries with large bilateral portfolio investments.

Abstract

We explore the global footprint of Chinese banks and compare it with that of other bank nationalities. Chinese banks have become the largest cross-border creditors for almost half of all emerging market and developing economies (EMDEs). Their global reach resembles that of banks from advanced economies (AEs). We take a nationality approach as international banks, and Chinese banks in particular, grant a substantial share of their cross-border loans from affiliates located abroad. But differences remain. Using a gravity model with a novel measure of distance capturing the role of foreign affiliates across all bank nationalities, we find that larger distances deter crossborder bank lending to EMDEs more than to AEs. For Chinese banks, however, distance deters lending to EMDEs less than for peer EMDE banks. We show that for all banks combined, bilateral economic interactions like trade, FDI and portfolio investment, positively correlate with lending. Chinese banks' lending to EMDEs also strongly correlates with trade, but not with FDI and, unlike other banks, it correlates negatively with portfolio investment.

JEL Classification: F34, F36, F65, G21

Keywords: cross-border banking, Chinese banks, trade, FDI, gravity model