China's banking system

China's banking system has overtaken the European banking system and become the world's largest banking system by its asset size. In addition, the top three largest banks are Chinese: Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China. And
Bank of China is the fifth largest bank, after Mitsubishi UFJ Financial Group. It is partially because of the high leverage ratio in the Chinese economy. Once the firms and the government as well as many local governments are borrowing from the banking system, the equity held by the banking system will increase. If the leverage ratio increases, and the equities will increases, then the expansion of the asset size of the banking system is not a surprise.

The enormous size of the Chinese banking system will force the banking system to grow fast and mature. In order to manage such size of assets, the banking system has to be more careful about its risk management and cash transfer management. This is a form of risk, but is an opportunity as well. The Chinese banks are generally internal and domestic banks. Although they have many assets across the world, their main business activities are within the Chinese border and their main business partners are Chinese firms and other companies which have business in China. Their corporate banking has been expanding outside China, but their personel banking is still limited within China. To management risk, there are several ways. The first way is to lower the leverage ratio, but as an ambitious bank, this is the least liekly strategy to be chosen. The second way is to pool the risk within the system. This is a very likely strategy to be taken but will increase the systematic risk in the banking system. The third way is to have more types of holding assets. Having one single type of assets has higher risk (or lower returns) than holding multiple types of assets. Therefore, the Chinese banks will expand their business.

However, the Chinese banking system has been influenced by the regulators to a great extent. As the systematic risk increases, more regulations will be introduced, and the growth of the Chinese banking systme I think will slow down.