Banks from China, Japan and Canada have overseen a surge in overseas lending since the financial crisis, helping to cushion a deep slide in cross-border capital flows thanks especially to a retreat by European banks, according to the McKinsey Global Institute.
While the stock of global foreign holdings—including loans, equities, bonds and foreign direct investment—has remained about the same since 2007 at 183 percent of world GDP, gross flows of capital across borders have plunged 65 percent.
Much of that has been due to European banks refocusing on their domestic markets as the euro crisis and new capital rules took hold, McKinsey said in a study on financial globalisation.
Key exceptions have been banks in China and Japan, which have funded their countries’ companies abroad and, in Japan’s case, sought to escape low margins and scant lending opportunities at home. Canadian banks are another outlier, having expanded their overseas operations mainly in the US.
“China’s leading banks demonstrated the largest relative increase in the share of foreign assets,” the McKinsey study said. The country “is gaining prominence in the global financial system,” ranking eighth in total foreign investment assets and liabilities in 2016, up from 16th in 2005. “It has significant room to further expand foreign investment.” Among the data on China, the McKinsey study dated last month found:
Chinese banks’ stock of foreign assets climbed to 9 percent of their total by last year, from 2 percent in 2007, and exceeded $1 trillion by the end of 2016. China’s value of total foreign assets and liabilities is equal to 101 percent of gross domestic product, well below the 350 percent average across advanced economies and also less than emerging markets including Brazil, Mexico and Russia.
Bank lending tends to be among the most volatile of flows, and its declining share of global cross-border capital has contributed to a greater level of stability,
according to the analysis by McKinsey researchers including Washington-based Susan Lund. A majority of cross-border investment is now in FDI and stocks, the group concluded.
“The financial system is more stable, but risks remain,” the researchers warned. “Capital flows—particularly foreign lending—remain volatile.
Over 60 percent of countries experience a large decline, surge, or reversal in foreign lending each year, creating volatility in exchange rates and economies.”