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China Banks Funding Belt and Road Are Under Glass-Steagall

July 12, 2017 (EIRNS)—China’s major public commercial banks have generated huge amounts of lending credit, with some estimates as high as $10 trillion driving global growth over the past decade, and have now invested and committed $300 billion in credit to major projects in Belt and Road countries outside China.

Despite dealing with bad loans and bubble bankruptcies in some sectors of China’s economy, these banks operate under the Glass-Steagall regulatory principle, which must be adopted by the United States and Europe if their banks are to become a credit channel for the economic progress once again.

A Financial Times article of April 5, 2016 noted,

"China, which has traditionally maintained a strict Glass-Steagall-style separation between commercial and investment banking, bans commercial banks from underwriting initial public offerings or acting as broker-dealers in the stock market, the two biggest revenue sources for securities companies."

This regulation dates to 1994-95, and to what is sometimes translated as the Commercial Banking Law of 1995.

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 to maintain Glass-Steagall separation.

One effect 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.