The worlds most valuable lender the Industrial and Commercial Bank of China better known as ICBC, as well as two Beijing-backed financial firms — China’s sovereign wealth fund the China Investment Corporation (CIC), and Central Huijin Investment have been granted permission to set up branches within the U.S. All three financial institutions will be recognized as bank holding companies, regulated as commercial US banks. The move would gradually allow the Chinese banks to purchase stakes in American banks.
The approval by the US Federal Reserve will make ICBC the first Chinese state-controlled bank to acquire retail bank branches in the United States. ICBC already has a branch in New York that focuses on commercial lending. The Fed took nearly two years to approve that branch, which it did in 2008. Experts meanwhile applauded the transaction, Chinese banks have long been seeking access to the U.S. banking system in order to provide financial support to Chinese companies operating overseas and to increase the exposure of the Yuan to foreign investors. ICBC opened their first office in India, in Mumbai late last year, for primarily the same reasons.
“This unprecedented acquisition of a controlling stake in an US commercial bank by a mainland bank is strategically significant,” ICBC chairman Jiang Jianqing said. “This could accelerate M&A as Chinese banks may look to acquire regional banks in order to establish a U.S. footprint,” added Jaret Seibert, Senior policy analyst at Guggenheim Securities’ Washington Research Group, to Bloomberg News.
The move also comes admist the US strong yet subtle pressure on Chinese banks to open their markets to foreign companies and investors. In last week’s talks, China agreed to allow foreign firms to own significantly larger stakes, although minority ones, in Chinese brokerage firms. It was a long-awaited breakthrough in a sector where restrictions have limited foreign firms.
ICBC which has been the most aggressive of China’s “big four” banks in expanding overseas will also buy up to 80 percent of the US unit of the Hong Kong-based Bank of East Asia for US$140 million, which operates 13 branches in New York and California. ICBC has total assets worth approximately US$2.5 trillion. The Bank of East Asia is small, with US$780 million in assets, and it focuses on retail and middle-market business loans. The competition will now include Bank of China branches in the New York metropolitan area, and CIC, which has a non-controlling stake in Morgan Stanley.
The purchase however isn’t expected to make a big dent in the US money market, – “The combined deposits of the relevant institutions in the Metropolitan New York banking market represent less than one percent of market deposits,” the central bank told the Bangkok Post.
The Fed also granted approval to Agricultural Bank of China Ltd. to build a branch in New York City, and to Bank of China Ltd. to build a branch in Chicago. Both are based in Beijing. Bank of China already has two branches in New York and one in Los Angeles.
While China’s banking and financial systems are gradually pried open by the US government, the move will also allow Washington to scrutinize the Chinese subsidiaries of the banks under US regulations, away from the protection of Beijing’s supervisors. While considerably yet small, the significance of the approval by the US Federal Reserve is a big move. It will not only help Chinese banks and their financial systems modernize to 21st century banking, but will also aid in the internationalization of the Yuan and funding to American based Chinese companies. A win-win situation for both countries.
ICBC, also based in Beijing, is 70 percent owned by the Chinese government. It is China’s largest bank, with US$2.5 trillion in assets, compared with US$2.3 trillion in assets for the largest U.S. bank, J.P. Morgan Chase & Co. ICBC is seeking to more than double the share of profits coming from overseas operations in the next five years, to 10 percent, from the current 4 percent.