Ajai Murali - Chinese Banks Head for the US

Source:

Tachang, Chi Chu. "Chinese Banks Head for the US." Businessweek 12 Nov. 2007: 28-30.

UCBH Holdings is a San Francisco based bank that servers a large Chinese-American customer base. Recently, it needed $205 million for an acquisition, so it teamed up with Minsheng Bank in China, which took up 9.9% ownership in UCBH. Chinese banks are starting to eye the US for expansion and an increased global presence as a provider of various financial services. It is an interesting phenomenon, especially since China only joined the World Trade Organization in 2001. The CEO of Minsheng Bank says it is eyeing the US simply because it’s cheaper. It’s almost a reverse outsource, if you will. Soon after Minsheng’s deal, Citic Group based in China bought 6% ownership in Bear Sterns.

US Regulators face a problem with the interest of Chinese banks to buy into US banks. While it encourages investments from overseas and it must approve all deals involving ownership greater than 5%, it is facing a different situation with Chinese banks. This is because of the regulatory environment that existed in China until very recently, and still exists in some cases. The regulatory environment is known to be lax and tends to engage in more corrupt practices than any US bank. The US regulators are supposed to be welcome to cross-border deals, and are certainly very involved when a US bank has interest in a Chinese bank. Eight of the twenty five largest bank-holding companies in the US by total deposits are owned by foreign companies, as we see global cross-border investments increasing.

China has been doing a lot of cleanup work to help privatize a lot of its institutions including banks as they moved away from centralized institutions. As Chinese banks become more knowledgeable, they are buying into countries in which their existing customers did business. Then, they are moving to areas where they are comfortable—such as Minssheng’s comfort with the Chinse-American management team at UCBH. China’s 3 top banks rank among the top 20 in the world as far as market value. Their average price to earnings ratio is 41.3, whereas US banks average 10.6. Investments in the US are brave ones, since the recent subprime credit problems as well as home loan defaults have made it a more turbulent market than usual. It helps the Chinese banks that the US dollar is as weak as it is, but not as much as the article reports because I believe the Chinese Yuan is pegged to the US dollar. It is important that the US change its attitude towards business practices in China, since China’s business practices have entirely changed. Each country must be given same treatment when it comes to investing in America.

This article is interesting because it plays a reverse role on the famous outsourcing to China trend. The Chinese banks are taking advantage of a vulnerable US market and US dollar, and will continue to invest here as long as the Fed continues to approve. It is also interesting that Chinese banks are looking to become full service financial centers, as we have seen transformations of big firms such as Schwab and Merill to try to become a full financial powerhouse as well. Foreign competition is healthy, but ultimately the chief banking regulator of China reports that if the US continues to cooperate, China will raise its caps on foreign investment. It will be interesting to see how this all plays out, and how different communication, currency, and management barriers are overcome. Of course, the IT is all there and there will be a technology transfer as more Chinese banks invest in the US.