May 17 , 2012
With the Federal Reserve’s announcement on May 9th that three of China’s largest banks (ICBC, Central Huijin Investment and China Investment Corporation) have been given approval to expand their operations in the USA, there has been speculation as to what the consequences of such a decision may be.
Adding to its reputation for aggressive overseas expansion, ICBC’s first move will be to purchase 80% of the US-owned New York portion of the Bank of East Asia, which is currently based in Hong Kong. In doing so, the bank, considered the world’s largest in terms of profit and market capitalization, would become the first Chinese state-controlled bank to set up retail branches in the United States.
Although the Federal Reserve has been quick to preempt a nervous reaction by stating that: "The combined deposits of the relevant (Chinese banking) institutions in the Metropolitan New York banking market represent less than one percent of market deposits", ICBC Chairman Jiang Jianqing noted: “This unprecedented acquisition of a controlling stake in a US commercial bank by a mainland bank is strategically significant.”
But perhaps the most significant development of all here is the assertion made by the Fed that the level of regulation in these Chinese financial institutions is now up to an acceptable standard (meeting the required ‘comprehensive consolidated supervision’ or ‘CCS’ status for application), they say, due to steady upgrades to the China Banking Regulatory Commission (CBRC), (China’s commercial banking supervisory committee) since 2003. They also referred to a recent IMF financial system stability assessment. Now that the precedent has been set, any banking organization in China that is supervised on substantially the same basis should be able to get approval from the Fed for its own applications. This paves the way for Chinese banks to expand their presence in the US financial markets via means of acquisition or establishment of US banking organizations. With combined assets of roughly US$11.5 trillion, it is surely only a matter of time before China’s numerous other internationally active CBRC-regulated banks follow suit.
What is yet unclear is how discerning the Fed will be in the future about which banks it allows to invest and which it declines, however, it is not likely that many will be turned away if they are subject to the same CBRC supervision. It is worth noting, that these banks are not private corporations, they are government entities. Corporations can not support massive losses, because they will go bankrupt. A corporation, as in the case of any privately owned business, has the goal of profit. The Chinese government's interest in buying banks may be ‘innocent’ enough, but because these banks are not private enterprises and have the financial backing of a national government, they may operate comparatively opaquely, with a similar and yet contrasting set of business practices.
About GCiS China Strategic Research
GCiS (www.GCiS.com.cn) is a China-based market research and advisory firm focused on business to business markets. Since 1997, GCiS has been working with leading multinationals in sectors ranging from technology to industrial markets, medical, chemicals, resources, building and constructions and a few others.