Chinese banks' non-performing loan ratio dropped from 2.42% in January 2009 to 1.66% at the end of Q3 2009. In contrast, Western banks have steadily increased loan-loss reserves. Some (such as Tony Wang and Grace Tian of ChinaKnowledge) have pointed to this change as proof that the Chinese banking sector has grown stronger during the financial crisis and is well situated to expand abroad.
But the non-performing loan ratio in itself is not a good indicator. In the first 11 months of 2009, Chinese banks lent 5.06T yuan more than in 2008 (for a total of 9.21T yuan). At the end of November 2009, M2 money supply is about 30% higher than a year ago. If one includes these increases, the change in the non-performing loan ratio is less impressive. At the end of the third quarter, the balance of loans on the books of Chinese banks increased 34.2%. If one includes this loan increase in the calculation, the non-performing loan ratio in the beginning of 2009 should be 1.8% (2.42/134.2), which is not much different from the end of Q3 2009.
Another common argument for the new strength and significance of Chinese banks is that three Chinese banks- ICBC, CCB, and BoC- now have the highest market caps of any global bank. But the high market cap of big Chinese banks has more to do with ebullient stock valuations, asset growth, and weak competitors than internationalization. In 2006, banks like Citigroup, Bank of America, and HSBC had market caps in the mid-200 billions as well. Only 5% of Chinese banks' business comes from abroad. According to a December 2009 MasterCard survey, 60% of Chinese people think Chinese banks were not affected by the crisis and 90% think it is safer to put money in domestic banks than foreign banks. Foreigners are unlikely to feel the same way. I doubt Chinese banks will find much success abroad.
