By Li Liming
Published: 2008-06-24

Cover story, issue 373 June 23 2008
Translated by Liu Peng
Original article:

Obstacles have been cleared for two Chinese state-owned banks – the Industry and Commerce Bank of China and the China Construction Bank – to set up branches in the United States, according to industry sources.

The US Federal Reserve was initially skeptical of the two banks, which are backed mainly by China's sovereign wealth fund, the China Investment Corporation (CIC). But China had made assurances that the CIC would not interfere in the operation and administration of the two banks, and would strictly play by market rules.

Market analysts said based on understandings reached during the fourth Sino-US strategic dialogue concluded last week, there appeared to be more optimism of Chinese banks gaining entry into the US market.

Clear the Way
Foreign banks seeking to set up branches in New York need approval by the Federal Reserve Bank of New York (NY Fed) and the New York State Banking Department, followed by the US Federal Reserve System (FED).

On June 15, a source from ICBC revealed to the EO that ICBC's application for setting up branches in the US had been approved by the NY Fed and NYSBD, but had met with difficulty with the US Fed.

The EO has learned that US Fed's reason was that China's sovereign wealth fund was ICBC's top shareholder, and the Congress was also suspicious of the role that the Chinese government played in the SWF. They believed that the SWF's investment were not purely out of commercial interests, and by extension, banks controlled by the SWF.

In addition, given that the Bank of China has established branches in the US, the US Fed was afraid that ICBC, CCB, and Bank of China would work together as a result of their shared SWF shareholder. As a result, ICBC's application was still pending.

However, a senior industry source revealed to the EO that after several rounds of high-level negotiations, China promised that the CIC would make investments in accordance with commercial rules and wouldn't intervene in the normal operation of the state-owned banks it has invested in. In turn, the Fed agreed to allow ICBC to set up outlets in New York and wouldn't put up obstacles for CCB's applications.

One market analyst said that hints could be found in the agreement reached during the fourth round of the China-US strategic economic dialog. According to the bilateral statements, the US restated its promise to open up its financial markets, to give Chinese banks equal treatment and to deal with applications made by Chinese banks in a timely fashion.

In fact, Chinese banks, like China Merchants Bank, had encountered similar barriers many times before. The Fed thought that China Merchants Group, one of four state-owned enterprises headquartered in Hong Kong, would exert influence on the Bank's operations. As a result, the Group made a promise that it wouldn't engage in business beyond the scope of what the Fed found permissible to gain entry.

Barriers Crop Up Unexpectedly
Market analysts said it was unexpected for ICBC and CCB to encounter such barriers.

ICBC submitted an application for establishing branches in the US last April, with CCB applying in February this year. At that time, China's sovereign wealth fund had yet to be established.

At the beginning of last year, one official from China Banking Regulatory Commission told the EO that after tough negotiations, the applications of ICBC and CCB had received the unofficial nod from US Fed and would likely be given an official reply later that year.

Then in September, the CIC was established with the Central Huijin Company becoming its wholly-owned subsidiary company. Central Huijin had, by that point, already become the main shareholder in the Chinese banks.

Previously, the CIC has invested in US-based private equity firm Blackstone Group and financial giant Morgen Stanley. Afterwards, the three state-owned banks formed relationships with the two firms.

On November 8, the US Fed announced its approval of China Merchants Bank to set up branches in New York, whose business included deposits and loans, trade-financing and other financial services. As a result, Merchants Bank became the first Chinese bank to touch down in the US financial market since the American government enacted the Foreign Bank Supervision Enhancement Act in 1991. Whereas, the Bank of China has gained entry prior to the Act coming into effect.

"In 2004 when the State-owned banks stock reform kicked off, the reform architects didn't expect the establishment of the China Investment Corporation or think that the Central Huijin Company would be incorporated into CIC. In the absence of such developments, there wouldn't have been these barriers," said one industry source who wishes to remain anonymous.