China’s Next Miracle?

After 15 years of excluding them, the Fed mulls reopening U.S. doors to Chinese banks.
Vincent RyanNovember 1, 2007

Barred from U.S. shores for 15 years, China’s banks may soon reestablish a beachhead here. As summer ended, the Federal Reserve was evaluating applications from China Merchants Bank and Industrial and Commercial Bank of China (ICBC) to open full-fledged branches in New York. The New York State Banking Department has already approved the China Merchants license, but that means little without the Fed’s consent.

The current exclusion dates to 1991 and the passage of the Foreign Banks Supervision Enhancement Act, which brought greater federal oversight to foreign banks operating in the United States after a number of fraudulent or unsound banking practices were uncovered. Since then, ongoing concerns about the poor quality of Chinese banks’ loan portfolios (including excessively large exposure to business loans), the laxity of their risk management practices, and the inability of the China Banking Regulatory Commission to rein in fraud have prevented any reconsideration.

China Merchants may end the 15-year drought. The sixth-largest bank in China, with $100 billion in assets, it has less government influence because it has been a joint stock bank. That’s in stark contrast with ICBC, which still resembles a government bureaucracy, says May Yan, a Moody’s banking analyst based in Hong Kong. China Merchants “knows how to control its risk because it has had to survive on its own,” she says. ICBC is still in the early stages of developing its risk-management and corporate-governance practices.

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If Chinese banks do reestablish themselves in the United States, experts say, they will likely begin by serving the commercial needs of existing corporate clients. As a start, anyway. Given their huge capital bases, “eventually they will be very significant players,” says David Kenny, a partner with Squire, Sanders & Dempsey LP. Chinese banking officials are watching the outcome. Were the United States to grant the licenses, they have suggested, they might allow foreign banks to take larger stakes in China’s domestic financial institutions.