The Chinese (banks) are coming

Last week, amid all the fuss about the French and Greek elections, the Federal Reserve Board approved the acquisition by the world’s largest bank by value, ICBC (Industrial and Commercial Bank of China), of a majority stake in the Bank of East Asia’s US banking business. ICBC, together with its parent organisations CIC (China Investment Corporation) and Central Huijin, will own 80% of the US business. All will become bank holding companies under the US Bank Holding Company Act. The assets of the business are only $780m and, together with ICBC’s existing New York branch, would represent less than 1% of deposits in the New York banking market. ICBC also has a broker-dealer business in New York City and in 2010 bought the Canadian assets of Bank of East Asia, which is a Hong Kong based bank.

At the same time the Fed allowed the Bank of China to set up a branch in Chicago and Agricultural Bank of China to set up a New York branch. All three banks are majority owned by the Chinese government through  Central Huijin Investment, which is turn owned by CIC, the main Chinese sovereign wealth fund. That is in turn owned by the Ministry of Finance. In ICBC’s case the government owns or controls 71% of the shares.

The Fed treated this transaction like any other: it simply had to check that the banks were properly capitalised and regulated and that the changes would not damage competition in the US banking market. Their confidence in ICBC’s capital base might give some comfort to those worried that the Chinese state banks are “built on quicksand” as some commentators believe. That view comes from noticing that all the big state banks have on their balance sheets large receivables which are the counterpart to debt restructurings arising from previous massive bad debt problems before the banks were privatised. The credibility of those assets is essentially that of the Ministry of Finance, which is their main shareholder. So this amounts to pointing out that the banks are intertwined with the Chinese government. In that sense they are in the world class league of too big to fail. There are widespread concerns that the latest, largest credit boom in 2009, which was part of the government’s plan to boost the economy after the US financial crisis, will lead to more bad debts. Respected economist Nicholas Lardy argues that lending boom was different in kind and less likely to lead to bad debts than previous ones, in his book “China’s Economic Growth After the Financial Crisis”. But that does sort of sound like it’s different this time…

Is this the beginning of an invasion? And is that a problem? It’s very early days yet but the Chinese banks all have ambitions to become on the world stage what they are already on the domestic one: major players. That might be a bit unsettling for the existing global banks (HSBC, Citi and perhaps JPMorgan Chase). But it might be good news for other, weaker foreign banks who might be happy to partner with the (on paper) highly profitable Chinese banks. And it might be even better news for bank customers, for whom more competition would be most welcome.

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