- Zongyuan (Zoe) Liu
The Middle Kingdom's "Big Four" Come to the Gulf
China’s largest state-owned commercial banks—Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China, and Bank of China—have been increasing their market share in the Middle East. Also known as the “Big Four,” these are the world’s top four largest banks. With their first foothold established in the Dubai International Financial Center (DIFC), each of the Big Four have opened operating branches in the Middle East and North Africa (MENA) region since 2008. From their branches in the DIFC, these banks run major regional operations and continuously expand their activities. According to the 2015 full-year operating review results of the DIFC, Chinese banks in the DIFC doubled their balance sheet over a period of 18 months. As of March this year, the Big Four contributed a quarter of DIFC’s collective balance sheet for banking.
There are at least three factors driving the expansion of the Big Four banks in the Gulf region and the MENA markets in general. First, these banks are not immune to the winds of global markets; the expansion of Chinese banks into the Gulf region happened under specific global financial conditions. In 2008, depressed oil prices (Figure 1) hit hard on the balance sheets of banks based in countries of the Gulf Cooperation Council (GCC) and curtailed GCC-based lenders. As the IMF pointed out, by the second half of 2008, the decline in oil prices and demand had directly affected GCC government finances and external positions. Governments and companies across oil-exporting countries in the Gulf region tightened their belts and began seeking alternative sources of financing. Meanwhile, traditional mega international banks and other non-banking financial institutions based in the US and Europe were hit hard following Lehman’s collapse in September 2008. The subsequent global liquidity crunch and deleveraging further curtailed the operations of these Western financial institutions in the Gulf region. It was under this specific set of global financial conditions that the Chinese state-owned commercial banks embarked on their expedition in the Gulf region.
Figure 1: Price of Crude Oil
Secondly, following the call of the state is always a preferred strategy of Chinese banks. Chinese policymakers and the China Banking Regulatory Commission (CBRC) have been devoting more effort to helping Chinese domestic financial institutions participate and compete in global financial markets. In particular, Chinese banks are encouraged to “go out” (走出去) alongside a bigger yet more challenging agenda of promoting RMB internationalization. The Big Four banks have doubled down on their efforts to “go out” since the launch of the Belt and Road Initiative (BRI), which created opportunities for Chinese banks to advance financial services in the GCC, adding additional momentum for their expansion in the MENA markets. On September 7, 2013, President Xi announced the launch of the Silk Road Economic Belt at Kazakhstan’s Nazarbayev University. Nine days later, on September 16th, during a meeting with the King of Bahrain, Sheikh Hamad bin Isa al-Khalifa, President Xi stated that China would deepen financial cooperation with Gulf countries. This shows Chinese policymakers at the highest levels are keenly aware of the financial gateway position of the Gulf region and highly value its strategic importance in the implementation of China’s BRI. Renowned cities in GCC countries, particularly Dubai, Abu Dhabi and Doha, are regional financial hubs that also provide convenient access to markets in the Middle East, Africa, Central Europe, and South Asia.
Last but not least, robust trade relations between China and Gulf countries, particularly members of the GCC, underpin the rationale for major Chinese banks ramping up their services in the region. China is both a major exporter of consumer goods and machinery to the region and a significant importer of Gulf energy. Chinese Minister of Commerce Gao Hucheng pointed out that the six-member bloc is China’s largest source of oil imports. IMF statistics also show that China is the GCC’s eighth largest trading partner. The EIU estimated that by 2020, the largest share of GCC exports will go to China. Within the GCC bloc, China is the top import origin of the UAE, valued at $28.6 billion, followed by India at $28 billion, and Germany at $12.2 billion. China has also consistently maintained its position as Dubai’s biggest non-oil trade partner. Such strong trade relations lay the foundation for the presence of Chinese banks in the region. In practice, especially following the launch of BRI, these banks not only offer direct trading and financial services to Chinese corporations and local businesses, but also expand their services to local enterprises and contribute to the finance and development of large-scale infrastructure projects in the region.
Today, all of the Big Four banks have set up operating branches in the DIFC with plans for further expansion. As will be discussed, the Big Four not only provide loans to the GCC markets, but also issue bonds—both RMB-denominated and US dollar-denominated—through Nasdaq Dubai, the region’s only international exchange. This will no doubt increase the global exposure of these banks, fitting well into the bigger picture of their overall globalization agenda.
More importantly, the increasing footprint of Chinese banks in the GCC and broader MENA region not only strengthen financial services to Chinese corporations operating in the area, but also facilitate the establishment of an RMB-based financial transaction and settlement network. Currently most of China’s energy purchases from the region are still settled by US dollars. As Chinese banks establish physical presence there and offer RMB settlement services, the adoption of RMB in financial settlement and transactions when involving a Chinese counterpart will be natural and readily available. In fact, there are already some signs pointing to further growth of RMB-denominated transactions. SWIFT’s RMB Tracker showed that the RMB has become the most active currency used by the UAE and Qatar for direct payments with China and Hong Kong. The physical presence of major Chinese banks in Gulf countries contributes to the establishment and utilization of RMB payment infrastructure in the region and the broader MENA area.
Figure 2: The UAE and Qatar Drive RMB Adoption in the Middle East
Figure 3: RMB’s Share as an International Payment Currency
Note: Customer initiated and institutional payments. Excluding payments within Eurozone
Messages exchanged on SWIFT. Based on value.
The following three sections summarize the strategic activities and development of the Big Four banks in GCC countries. The key takeaway from the following discussion is that the most recent internationalization campaign was initiated before the launch of BRI. The fact that they were able to achieve rapid expansion certainly has a lot to do with the commitment of these banks and the political and financial support they received from the Chinese government. It is also worth noting that the BRI has promoted industry-wide collaboration and regulatory cooperation. In November 2018, the China Banking Association (CBA) signed a memorandum of understanding (MOU) with DIFC. The two entities will “collaborate on sharing best practices and delivering enhanced services to over 2,000 active registered firms operating in DIFC and 695 members units of CBA in the areas of financial services and FinTech.” By 2018, CBRC had signed cooperation MOUs with banking supervising authorities in 32 countries along the Belt and Road with the intent to pave the way for better cooperation between Chinese banks and local banks. However, the broader macro international financial markets background, particularly after the Lehman shock, also to a large extent made it convenient for the expansion of Chinese banks in the region.
Industrial and Commercial Bank of China (ICBC)
ICBC formally entered the Middle East in 2008, becoming the first Chinese bank to set up an operating branch in the Gulf region. According to its corporate statement, ICBC has been the largest Chinese bank in the region since 2014, both in terms of number of branches and scale of business. As part of ICBC’s strategic expansion in the Middle East, it has opened branches in Dubai, Abu Dhabi, Doha, Kuwait, and Riyadh.
Since 2008, ICBC has increased its presence among Gulf countries quite rapidly. Its operations were initially focused on commercial banking. Today, ICBC also provides services of investment banking and asset management to its Gulf clients. Tian Zhiping, chief executive of ICBC’s Middle East regional division, once said in a 2012 interview that ICBC is interested in “all trade-related businesses,” and wants “to be able to give advisory services to clients, introduce Chinese businessmen to the Middle East, and vice versa.”
In April 2015, the Qatar government opened the Qatar Renminbi Centre (QRC), the region’s first clearing center for the Chinese currency, allowing for trades priced in RMB to be cleared locally in Qatar rather than in other global clearing centers such as Shanghai or Hong Kong. ICBC has since become the designated clearance bank servicing the QRC. Within a year of the QRC’s launch, it became the third-largest overseas currency clearing facility globally serviced by ICBC, handling 350 billion RMB ($52.6 billion) in transactions from its inception until August 2016.
In 2016, ICBC was ranked the ninth largest provider of syndicated loans in the GCC, up from its ranking of 54th in 2015. So far, ICBC’s Gulf client list includes but is not limited to a number of state-related companies, such as Abu Dhabi’s International Petroleum Investment Company and Mubadala (recently the two merged into a new fund, Mubadala Investment Co.), Emirates Airline, Qatar Telecommunications, Qatar Airways, Qatar National Bank SAQ, Emirates National Oil Company (ENOC), Emirates NBD, Dubai Electricity & Water Authority, Saudi Electricity Co., etc.
ICBC is also the second Chinese bank to join Dubai Commodities Clearing Corporation (DCCC), following Bank of China. It also became a settlement bank for the Dubai Gold & Commodities Exchange (DGCX) starting from November 2016. This helps to provide sufficient RMB liquidity for trade and investment between China and the region.
Major ICBC Activities in the Gulf
Bank of China
Bank of China (BOC) is ranked the world’s fourth largest bank in terms of total assets under management in 2016, and is also the only Chinese bank to be included in the group of Global Systemically Important Banks (G-SIBs) every year since 2011.
Though ICBC was the first Chinese bank to set up an operating branch in the Middle East, it was the BOC that first commenced a premise in the Middle East and North Africa. The bank opened its Bahrain Representative Office in the Diplomatic Area, Manama on July 1, 2004. Unlike an operating banking unit (OBU), the Representative Office functions as an information collection and market research agency, provides general assistance to customers in the region, and promotes banking business and investment opportunities between China and the region.
In December 2012, eight years after the introduction of BOC’s Bahrain Representative office, BOC launched its DIFC branch, which is the bank’s first operating branch in the Middle East. Then in May 2015, BOC signed an MOU with the DGCX, which “created a framework for the two institutions to enhance interaction and collaboration between the derivatives and financial markets of the UAE and China.” A year later, in March 2016, BOC was appointed by DGCX as a Settlement Bank for DCCC, making BOC the first Chinese bank to join the DCCC and become a settlement bank.
In recent years, BOC has been rising up the underwriter league table, climbing from the 145th rank for worldwide sales in 2009 to 46th place in 2016. The bank was one of the nine underwriters hired by the Saudi government to arrange the kingdom’s first international bond sale. The other eight underwriters were Citi, HSBC, JPMorgan, BNP Paribas, Deutsche Bank, Goldman Sachs, Morgan Stanley, Mitsubishi UFJ, and NCB Capital. Since 2017, BOC has been providing recommendations on investment opportunities in China for Gulf-based corporations and Gulf-based sovereign wealth funds.
Agricultural Bank of China (ABC) and China Construction Bank (CCB)
ABC and CCB are ranked the world’s third and second largest, respectively. Both are no less significant than ICBC or BOC when it comes to the financial service network in China. Similar to its Chinese peers, both also chose to open its first Middle Eastern branch in Dubai’s DIFC, and they embarked on their expansion in the MENA around the same time. ABC’s Dubai branch held its official inauguration on March 25th, 2013. About two months later, CCB opened its first operating office in DIFC in May.
ABC is the first among the Big Four to tap into the region’s bond market and is the first Chinese issuer to list an RMB bond on an exchange in the MENA region. It listed a 1 billion RMB ($163 million) bond on Nasdaq Dubai—the Middle East's only international exchange by regulation—in September 2014. A year later, ICBC listed a $500 million bond on Nasdaq Dubai in June 2015. About a month later, BOC (Abu Dhabi branch) listed a 2 billion-yuan ($322 million) bond for the BRI on Nasdaq Dubai in July 2015. CCB (HK branch) listed a $600 million bond on Nasdaq Dubai in October 2016, and about a month later, ICBC listed a $400 million bond in November 2016.
In September 2016, ABC DIFC Branch was designated by the PBoC to clear yuan transactions in the UAE, making the bank the second clearing hub in the Middle East for handling RMB transactions. A month later in October, ABC DIFC Branch was appointed by the DGCX the first market maker for the Shanghai Gold Futures contract listed on its exchange.
The expansion of Chinese banks into the GCC countries following the Global Financial Crisis has achieved tangible results within a relatively short period of time. As discussed earlier, the Big Four banks established their presence in the Gulf region before the launch of BRI. Therefore, it would be factually incorrect to say that the presence of Chinese banks in the Gulf and MENA region was initially driven by the BRI. Rather, the specific set of conditions in global financial markets following the Lehman shock, the long-term government call for Chinese banks to “Go Out,” and the significant trade relationships are three factors behind the initial expansion of major Chinese banks in the Gulf region. The launch of the BRI provided further political and strategic support for the banks to grow and enlarge the scope of their business in the region. The physical presence of Chinese banks along key countries and cities of the Belt and Road also facilitates the implementation of the economic and financial agenda of the BRI.