Host country political uncertainty and risk in Chinese state-owned commercial banks: the moderating role of bilateral relations

Purpose The stability of state-owned Chinese commercial banks, as global systemically important banks (G-SIBs), plays a crucial role in maintaining financial stability in developing economies. However, limited research has focused on these banks. This study examines the overseas branches of state-owned Chinese commercial banks, focusing on how political uncertainty in host countries affects their risk exposure and how bilateral political and trade relations influence this relationship. Design/methodology/approach The research is based on data from 47 overseas branches of six major state-owned banks across 22 countries from 2013 to 2022. Panel regression models are used to assess the impact of political uncertainty in host countries on bank risk as well as the moderating effects of bilateral political and trade relations. An instrumental variables approach combined with propensity score matching is applied to address potential endogeneity. Findings The results show that high levels of political uncertainty in host countries raise the risk faced by these banks, but strong bilateral political ties can help reduce this impact. In contrast, close bilateral trade ties tend to amplify the effect, driven by the client-following behaviour of Chinese banks. Research limitations/implications This paper offers a fresh perspective on risk management in multinational banking. It examines how bilateral political and trade relations affect bank risk levels, enhancing understanding of cross-border banking risks. By applying the “relative gains theory”, the study expands the view of how political uncertainty shapes international banking. However, limitations remain. First, limited financial disclosures restrict the scope of risk indicators, making it hard to capture diverse risks. Second, as most overseas branches are state-owned, the sample lacks ownership diversity, limiting comparisons under similar political uncertainty. Practical implications The findings of this paper provide valuable insights for Chinese state-owned commercial banks operating overseas. By understanding the moderating role of bilateral political and trade relations, these banks can enhance their risk management strategies in politically unstable regions. It also helps policymakers and financial institutions to better assess and mitigate the risks associated with political uncertainty in host countries, thereby promoting more stable and efficient international operations. Originality/value First, focusing on state-owned Chinese commercial banks, it explores the impact of political uncertainty in host countries on the risk of state-owned commercial banks, enriching the research on the impact of political uncertainty on the risk of commercial banks. Current research focuses on traditional commercial banks and special types of Islamic banks, while there is a lack of in-depth research on state-owned commercial banks. Second, from the perspective of multinational banks, we analyse the moderating role of bilateral relations between home and host countries in the impact of political uncertainty on bank risk and assess their moderating effects separately.