China's financial might takes shape

Before long the Chinese will dominate list of 100 top influential people in finance

The US magazine Worth published a report recently analyzing the 100 most powerful people in global finance. Four were from China: Shang Fulin, chairman of the China Banking Regulatory Commission; Zhou Xiaochuan, governor of the People's Bank of China; Lou Jiwei, chairman and CEO of China Investment Corp; and Jiang Jianqing, chairman of the Industrial and Commercial Bank of China. They were ranked 14th, 15th, 27th and 31st.

That only four of China's top financial figures were included in the list shows how much understanding of the power of China's financial and banking system still lags behind its reality. There are exceptions. For example, Bloomberg journalists Henry Sanderson and Michael Forsythe, in their recent book China's Superbank, said that Chen Yuan, chairman of China Development Bank, is "the world's most powerful banker". But in banking it would seem Deng Xiaoping's famous advice that China should "hide brilliance, cherish obscurity" is alive and well.

This is a serious error, as will rapidly become apparent. To grasp the underlying dynamic of the global financial industry it should be noted that it is a mistake to understand the strength of China's economy by statistics (such as the facts that China produces as much steel as the next 38 countries combined; more cement than the rest of the world put together; that it is the world's largest market for TVs, refrigerators, mobile phones, cars; or that it has more than twice as many Internet users as the US).

These figures are impressive but far from illustrate the real core of China's economic power. The real center of its economic strength, which determines both its domestic and global expansion, is unparalleled financial strength.

China has yet to overtake the US in GDP, but the annual sum of China's finance available for global or domestic investment - its savings - is already twice that of the US. As the chart shows, China's savings in 2011, the last year for which comprehensive figures are available, were $3.6 trillion, double that in the US.

But savings are the raw material of the financial system. It is this huge flow passing through China's banking system that is making China the world's financial superpower. China's $3.3 trillion foreign exchange reserves, easily the world's largest, are a powerful adjunct but it is the year-after-year generation of domestic finance on a scale that has no international parallel which is the unmatched core of China's economic strength.

To see the dynamic this is creating in the global finance industry it is useful to compare the main indices for banks in China and the US. When this year's figures are published they will further reinforce these trends.

US banks reporting last year were still ahead of China's on revenue - $550 billion compared with $404 billion, and on assets - $10,079 billion compared with $9,895 billion. But on profits China's banks had already overtaken their US competitors, $105 billion compared with $68 billion. China's banks also held the lead in stock market valuation, $992 billion to $847 billion.

At the beginning of this year, both China (ICBC, China Construction Bank, Agricultural Bank of China, Bank of China), and the US (Wells Fargo, JPMorgan Chase, Citigroup, Bank of America) 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. ICBC is the world's largest bank by both profit and capitalization.