Advent of a banking superpower

Country has massive lead over the United States in terms of availability of savings, says expert

John Ross believes China will soon be better known for the firepower of its banks than being the workshop of the world for inexpensive manufactured goods.

The 66-year-old, who was economic adviser to former London mayor Ken Livingstone and is now senior fellow at Chongyang Institute for Financial Studies at Renmin University of China, says the might of the country's financial institutions will soon be felt right across the world as its economy upgrades.

"It is OK to say China produces more cement than the rest of the world put together, that it produces more steel than the next 20 countries put together and it has twice as many Internet users than does the United States," he says.

"All that is very impressive but it is finance that makes the economy work and in terms of financial strength China is already ahead of the United States."

Ross, also an influential columnist and economic commentator, was speaking at his home north of London, a city which has already seen major Chinese investment in the financial sector.

The Chinese flag flies over the Bank of China building, opposite the Bank of England and right in the heart of the City of London financial district.

China Investment Corporation, China's sovereign wealth fund, came to the rescue of London's second financial center when it was a major part of the 880 million pounds (1.03 billion euros, $1.33 billion) bailout of Canary Wharf in 2009.

"They are going to be number one. Finance is going to be one of China's biggest industries. It will impact on us all because banking is now the world's biggest industry," he says.

"China will be a stronger force in finance than in manufacturing since although a lot of manufacturing took place in China, it didn't produce many world-class companies and also much of it was done for foreign companies."

Ross, who is also visiting professor at Shanghai Jiao Tong University, has seen first hand the rise of China's financial institutions.

In his eight years as the Mayor of London's director of economic and business policy (effectively deputy mayor), he also witnessed their increasing overseas dominance. In this role, he was responsible for developing London's economic relationship with Beijing.

"In finance China has such a massive lead over the United States in terms of availability of savings, which are the raw materials of the financial services industry.

"It is only a matter of time before people will see the dramatic impact of that. In many parts of the developing world China is already a dominant player in financial services."

Ross says one of the big ambitions of the City of London is to be the premier renminbi trading area outside of China.

"I have had discussions and they tell me that it is high up on their agenda to make London the main center of international operations for the RMB," he says.

Ross says that within China itself, many are too hung up on the subject of banking reform.

Some take the view Chinese banks will not become dominant players abroad without interest rate liberalization (currently interest rates are centrally set) and the internationalization of the renminbi.

"It depends what you mean by reform. I don't think it is a good idea to copy what the Western banks have done unless you want to invite complete catastrophe.

"I agree with Warren Buffett's analysis that all these complex derivative products were weapons of mass destruction, and that is what he said before the 2008 financial crash."

The academic says that Western banks are currently in a far more privileged position than Chinese banks.

"As Martin Wolf (economic commentator) writes in the Financial Times, you have a current situation where the private Western banks take all the profits and the Western taxpayers all the losses.

"If you went into a casino, and you were told to keep all the winnings and that someone else would take the losses, it is not going to invite very responsible behavior. If you cannot go bankrupt, nothing is too big a risk."

He believes the Big Four banks in China - Bank of China, ICBC (Industrial and Commercial Bank of China), China Construction Bank and Agricultural Bank of China - often come under unfair attack for not lending to small businesses.

"UK banks actually come in for the same criticism. It doesn't take 1,000 times the effort to do a $1 billion deal as one for $1 million.

"What China needs to develop is a network of smaller banks that lend to small businesses instead of the current "shadow" unofficial banking. This is the same model followed by Germany with their Landesbanks."

Ross says this would leave the Chinese banks free to focus on building global international businesses.

He believes they are already adopting the right strategy by building up a presence in developing markets. ICBC bought a 20 percent stake for $5 billion in Africa's largest bank, Standard Bank, in 2007 and is also expanding in Latin America.

"There are sound reasons why they are concentrating on developing economies. You have the famous Chinese saying about when you cross the stream, you have to feel the stones beneath your feet. They have got to build up management experience. I think that is the sensible way."

He adds that there are huge commercial opportunities in Africa, where eight out of 10 people have no access to finance.

"I think China is brilliantly placed to develop retail banking in Africa."

Apart from the obvious physical presence of Bank of China in the heart of the City of London, the same bank has also had high visibility in the New York real estate market.

It has been involved in some high-profile deals such as the refinancing of the Mandarin Oriental hotel and is increasing its loan book in the sector while European banks such as Anglo Irish Bank, Commerzbank and Societe Generale are retreating.

"The Chinese banks are dipping their toes in the water in places like the New York property market in the developed market and I think this is the sensible way.

"To start to build up a core of Chinese management with real serious and deep international experience will take five years. To finish that process will take 20 years. It is not just the case for China but for any country."

Ross believes one area in which the Chinese banks are going to be dominant across the world is with the Chinese banks' card payment system UnionPay, and that it is soon going to provide strong competition for Visa and Mastercard.

UnionPay cards can now be used in more than 100 countries and are widely used, in particular, in Africa.

"This is going to be massive. Any Chinese banking strategist will see that there is space in the market to compete against Visa, Mastercard and American Express. I think this is the way Chinese banks can enter the retail market overseas."

Ross has no doubt that China will emerge as a financial superpower within a generation with its banks being household names and wielding huge influence. "The perception of it being a huge player and the reality will coincide."