China, not the US, is the world’s financial superpower

It is often believed China’s economy is strongest in physical production or some service sectors – statistics are frequently quoted that China produces more cement than the rest of the world put together, more steel than the next 20 countries combined, the largest number of cars in the world are sold in China, China is the only country with over 1 billion mobile phone users, China has more than twice as many internet users as the US etc.

These are impressive statistics but they understate, because they are not the core of, China’s economic strength. China’s greatest economic strength is finance. In this field China has already overtaken the US even before China’ GDP equals the US. This dynamic determines the strategic development of China’s economy during the next decades.

To show this process the chart below shows the total amount of finance created in China and the US each year available for investment – i.e. total savings. The data is not percentages but the absolute amount in dollars at market exchange rates.

In the latest year for which data is available total annual finance created for investment was China $3.6 trillion US $1.8 trillion – the sum in China is already twice that of the US and its lead is increasing.

These savings are not only the requirement for investment but the ‘raw material’ of financial institutions. The dynamic which flows from China already overtaking the US in this field can be clearly seen by comparing China’s finance and manufacturing companies. This shows that China’s strongest sector in terms of international comparative strength is not manufacturing, as often believed, but banking – the sector closest to finance.

China is slightly ahead of the US in manufacturing output but a significant part of this is by foreign companies – these account for half China’s manufacturing exports. It is therefore crucial not to confuse China as a base for manufacturing with the strength of China’s own manufacturing companies.

To show the contrast note that China’s GDP is slightly over half the size of US GDP at market exchange rates. But in 2012 turnover of US manufacturing companies, in the world’s 2,000 largest listed companies, was $3,007 billion, almost 10 times the $316 billion for Chinese manufacturing companies. China’s manufacturing companies are therefore much smaller in scale, relative to US competitors, than indicated by the size of China’s GDP compared to the US.

In banking, reflecting the financial trends analysed above, the situation is the reverse. US banks reporting last year were still ahead of China’s on revenue – $550 billion compared with $404 billion, and assets – $10,079 billion compared with $9,895 billion. But in profits China’s banks had overtaken their US competitors – $105 billion compared with $68 billion. China’s banks held the lead in stock market valuation, $992 billion to $847 billion.

At the beginning of 2013 China and the US each had four out of the world’s top 10 banks by market capitalization, but the total valuation of the Chinese banks was $706 billion compared with $620 billion for US banks.

Therefore, although China’s GDP is slightly over half that of the US the overall financial position of China’s banks is already equal to their US competitors – China’ banks in overall terms are therefore stronger relative to US competitors than would be expected from the relative size of the two countries GDPs. China’s far more rapid buildup of domestic finance means the balance will progressively and rapidly move in favor of its institutions – in a relatively short period the overall financial position of China’s banks will overtake US banks on all measures.

Where US banks traditionally held a strong lead over China is that China’s were essentially domestic banks but US banks operated globally. However, this will change as China’s banks go global.

First to globalize were China’s official development banks. In 2005-2011 China Development Bank and Export-Import Bank of China provided more than $75 billion in loan commitments to Latin America. In 2010 their $37bn commitment was more than the World Bank, Inter-American Development Bank and United States Export-Import Bank combined. In Africa China’s Exim Bank has lent more than the World Bank every year since 2005 – its loans in 2011 being $15 billion.

Globalization of China’s commercial banks is following. By the beginning of 2013, ICBC operated in 39 countries with overseas assets of $170 billion, a 30% increase on 2011. The stability and state guarantee of China’s banks is attractive compared with the continued scandals from US and European competitors.

Therefore there is a clear dynamic. China’s annual creation of finance for investment is double that of the US – China not the US s the world’s financial superpower! It is therefore sectors closest to finance in which China is strongest. It will take a longer period of time to turn that financial strength into institutional strength in sectors outside finance. China’s banks will overtake their US competitors long before China’s manufacturing companies overtake theirs!

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This article originally appeared in Chinese at Sina Finance.

John Ross is currently Visiting Professor at Antai College of Economics and Management,Shanghai Jiao Tong University, where he leads research on globalisation and on China and the international financial crisis.
Check out his blog: http://ablog.typepad.com/keytrendsinglobalisation/ , or follow him on twitter @JohnRoss43