China to have the world's biggest domestic banking market by 2023, PwC says, and its banks are likely to expand overseas

By Gareth Vaughan

The global financial crisis (GFC) has fast forwarded the accession of China's banking market towards becoming the world's biggest by 20 years, according to PricewaterhouseCoopers (PwC), which also suggests some Chinese banks may look to set up shop in New Zealand.

In a report entitled Banking in 2050, auditing and advisory firm PwC says China's banking market, in terms of domestic banking assets, is now likely to overtake the United States in 2023. That compares with PwC's 2007 prediction that it wouldn't do so until 2043.

"The recent GFC shook the world economy and set in motion significant changes to the banking industry," PwC says.

Banking markets of the world’s seven leading emerging economies (E7) - Brazil, Russia, India, China, Mexico, Indonesia and Turkey - are forecast to outgrow their Group of Seven (G7)   -US, Britain, Germany, Japan, France, Italy and Canada - counterparts by as much as 50% by 2050, PwC adds.

"Sustained and strong GDP growth (4% or more), population increases, and currency appreciation are the expected drivers of domestic banking sector expansion across E7," PwC says.

The firm predicts China's domestic banking assets, at US$6 trillion in 2009 placing it third behind the US and Japan, will rise to US$31 trillion by 2030 and US$72.2 trillion by 2050 comprising more than one fifth (22.9%) of the global total. Over the same timeframe the US will rise from US$14.7 trillion to US$46.5 trillion.

India is expected to surge from twelfth to third, or from US$945 billion, to US$38.4 trillion, which would represent growth of 40 times. To do so India will need to continue the pursuit of "growth friendly policies", PwC says, meaning investing in infrastructure, opening up markets to increased competition, reducing budget deficits and increasing rural education.

PwC notes banks in emerging economies have the opportunity to capitalise on large, unbanked populations and booming demand for financial products. PwC's new report estimates the E7 will outgrow the G7 by 2036 - a decade earlier than its 2007 prediction - reflecting  the GFC's "far more severe" impact on the G7 than on the E7.

Potential speed bumps

However, the rise and rise of E7 banking markets isn't likely to be without hiccups. Ryan Tsang, Standard & Poor's Hong Kong-based managing director of Asia-Pacific financial institutions ratings, recently told interest.co.nz that the credit rating agency saw lending to local government financing vehicles and to property developers as the two key areas of risk for Chinese banks.

Nonetheless, PwC's report estimates the value of E7 banking assets will rise 16-fold to US$144.7 trillion by 2050.

"By this time the E7 will control nearly half of the world’s projected US$300 trillion banking market. In addition, the E7’s collective net interest income is projected to grow nearly nine-fold to US$4.4 trillion as these economies capture a far greater share of global banking profits," PwC says.

Sam Shuttleworth, PwC New Zealand financial services partner, told interest.co.nz that against this backdrop of expected E7 growth a key question was whether banks from the emerging economies follow the path trodden by US and British banks in the past and expand overseas, or whether they focus mainly on their home economies and supporting the overseas trading of domestic companies.

"When you're looking out 30, 40 years, anything is possible," Shuttleworth said.

"The other thing that can't be ruled out is could one of the emerging banks acquire a stake in one of the New Zealand banks? Because if you are trying to take on the retail market, the amount of infrastructure spend and so forth to target the main street banking environment, there is a big investment and high set up costs," Shuttleworth said. "The other way is the big bang - acquiring something."

"With China predicted to overtake the US by 2023, there will be a looking offshore, I suspect, of where can we go?"

New Zealand's big four banks - ANZ New Zealand, ASB, BNZ and Westpac New Zealand - are all Australian owned. Their Aussie parents are overseen by the Four Pillars policy which maintains their separation, preventing them from merging with or acquiring each other.

Indian banks already here, ANZ over there

So far India's Bank of Baroda, in September 2009, and Bank of India, in March this year, have joined New Zealand's list of registered banks, but are largely niche players at this point supporting trade flows between NZ and India.

There are also moves the other way afoot with ANZ, which locally incorporated in China last year,  announcing the launch of banking operations in India yesterday. ANZ has opened its first branch in Mumbai which will initially support corporate and institutional banking clients in India and ANZ’s network clients. ANZ says the branch will provide a full range of Indian Rupee and foreign currency banking services including funding and hedging solutions, trade finance, cash and payments, foreign exchange and debt capital markets and access to ANZ’s expertise in natural resources, agriculture and infrastructure.

The Mumbai opening comes after ANZ received approval for a banking licence from the Reserve Bank of India in October last year.

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