Chinese banks sail into uncharted waters as they expand globally

Chinese banks are sailing into uncharted waters as they follow their wealthy corporate and retail clients abroad, though obstacles brought about by compliance investigations are unlikely to slow the momentum as mainland lenders buck the trend that has seen their foreign counterparts trim global operations, market observers said.

Some banks have already hit choppy waters.In September, Agricultural Bank of China was ordered by the US Federal Reserve to overhaul its protections against money laundering to address “significant deficiencies”, the US central bank said in a statement on Thursday.

The lender, one of China’s biggest banks, will have to come up with a written plan within 60 days to fix the shortcomings in managing risk in its New York branch and to maintain better control over suspicious activity, the Fed said. However, the order didn’t carry a monetary penalty.

The slap on the wrist comes as domestic Chinese banks are poised to accelerate their overseas expansion over the next five years as they follow their clients abroad.

“In the early stage of domestic banks’ opening up in the past, it was more about embracing foreign players in the home market,” Liu Xinyi, president of Shanghai Pudong Development Bank, told the Lujiazui Forum in Shanghai in June. “But we have seen a growing trend in the past five years where more domestic lenders are making a foray into overseas markets.

“China is transferring from capital inflow to outflow and financial institutions should move in tandem with those corporate clients to go abroad,” Liu said.

Overseas business, including offshore services, accounted for less than 5 per cent of Shanghai Pudong Development Bank’s total assets – which analysts say is far from enough considering the need to follow the trend of more and more Chinese companies going abroad.