Bank of China expansion raises disclosure questions

George Lekakis Foreign Subsidiary Bank

Bank of China faces a bout of public scrutiny after its emergence as the fifth largest lender to the Australian government sector behind the Big Four domestic banks.

Disclosures in APRA’s monthly banking statistics show that a government customer borrowed A$100 million from the state-owned Chinese bank in October last year.

It is rare for Australian governments or their agencies to borrow directly from state-owned foreign banks given the potential for such arrangements to create conflicts of interest for domestic governments.

Banking Day has not been able to verify the identity of the government borrower, but the reporting of the loan to APRA coincided with Victorian Premier Daniel Andrews signing a bilateral trade deal with the Chinese government on 8 October last year.

Victoria signed up to the controversial “One Belt, One Road” trade network despite opposition from the Morrison government that is worried about China’s rising political influence in the Pacific region.

The wording of the memorandum of understanding between Victoria and China initially was kept secret at the request of trade officials in Beijing, but was released in November after public pressure mounted on Premier Andrews.

The wide-ranging agreement includes provisions for “financial cooperation” between Victoria and China’s National Development and Reform Commission, the coordinating body of the One Belt One Road global network.

So far, no state government in Australia has disclosed details about any borrowings from the Bank of China.

If Victoria has borrowed $100 million from the bank as part of entering the trade pact it is certain to put heat on the Andrews government to explain why the loan was not disclosed before the state election last year.

One of the recurring concerns about Chinese state-owned banks lending to foreign governments is that it increases Beijing’s potential to secure control of strategic assets such as ports and rail infrastructure in debtor countries.

The Malaysian government has been reviewing its involvement in the trade network in the last six months amid concerns that China-funded infrastructure projects were grossly overpriced.

While the identity of Bank of China’s new government client in Australia remains a mystery, the bank has leapfrogged - in one fell swoop - a string of lenders including Macquarie, Bendigo Bank and Suncorp in the competitive government banking market.

Moreover, Bank of China’s growth in government banking in Australia has been even more pronounced on the liability side of its business.

The bank’s holdings of public-sector deposits have soared from zero at the start of October last year to $254 million at the end of February.

However, the boom in government business at the Bank of China has not been matched by other Chinese institutions with branch operations in Australia.

Banking giants such as the Agricultural Bank of China and ICBC have never reported any loan or deposit activity involving government customers since they began operating in Australia in the last decade.

Bank of China’s rapid penetration of the government banking segment is unusual given that the four big domestic banks account for more than 90 per cent of all loans and deposits involving public sector customers.

NAB has a leading position in lending to government, accounting for slightly more than $2 billion worth of credit, while CBA dominates the government deposits market.

CBA’s deposit holdings of $30.5 billion exceed the aggregated government deposits of its three main rivals.