Over the past decade, China’s banks have generated some $10 trillion of credit. During the same decade, the financial institutions of the trans-Atlantic sector plus Japan have issued more than $15 trillion in cumulative “quantitative easing” (QE). But whereas China’s credit has gone into productive activities, the western QE money – half again as much as what China issued – went exclusively into pumping up the speculative bubble again.
China has become the locomotive of the global economy, with a growing part of its credit being channelled abroad as part of the Belt and Road Initiative and invested in modern infrastructure and the most advanced scientific activities of the planet in the fields of space, fusion energy, etc. At the same time, the West has suffered an industrial and infrastructure collapse, growing poverty and high unemployment, as well as the abandonment of many scientific endeavours.
The main reason for this apparent paradox is that China’s banks operate de facto under the Glass-Steagall regulatory principle, whereas western banks are deregulated along the model of “universal banking”.
Ironically, just as the United States was in the process of repealing the Glass-Steagall standard, China introduced that very same regulation, and has since then resisted any western-induced temptation to abandon it. Under the Chinese Banking Law of 1995, commercial banks – be they government-sponsored or private – are forbidden “from underwriting initial public offerings or acting as broker-dealers in the stock market, the two biggest revenue sources for securities companies”, as noted in a Financial Times article of April 5, 2016.
Pressure to break down the barrier and go toward “universal banking” arose in 2003-04, and again in 2015, when bank profits fell, but it was resisted both times. Economic growth actually accelerated after each of those decisions for strict separation of the banks. Bubbles do exist in the Chinese economy, but the commercial banking sector is generally insulated against a crisis in the financial economy.
One consequence of this is that China’s main commercial banks have much larger commitments to lending, and a much greater proportion of loan interest income, than U.S. or European megabanks. Non-interest income, which was 50-60% of revenue for HSBC, JPMorgan Chase, Deutsche Bank, and Citibank in 2015, was under 20% of revenue for the Bank of China, China Construction Bank, and Agricultural Bank of China, and 30% of revenue for the Commercial and Industrial Bank of China.
And despite their giant contribution to global lending and credit, the Chinese commercial banks have less than 3% of the derivatives exposure of the world’s major banks.