Banking Across Borders

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 cross-border 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.

Capital flow deflection under the magnifying glass

“…This increase in the number of material bilateral partners increases the potential for capital flow deflection. Evidence shows that EME‐EME links often make up more than half of EMEs' cross‐border borrowing (Cerutti et al, 2018), and the prominence of bank cross‐border linkages with respect to portfolio investments for EMEs. In our bilateral dataset, EME–EME links represented in 2017 43% of banking inflows to EMEs, while they represent only 1% of equity inflows to EME and 8% of debt flows.…”