China’s Financial Institutions Expand Overseas

The world’s beleaguered financial services industry may begin receiving much needed capital support from an unexpected source—China. Reflecting the relative strength and growth of their country’s underlying economy, Chinese banks and securities firms are now following the examples of their industrial cousins and stepping up overseas expansion plans.

Ever since I’ve been in China, the stability of Chinese banks has been called into question by outside observers. By way of contrast, American and European banks were held up as shining examples of financial strength, stability and transparency. The tables now appear to have turned.

Hard hit by the global financial crisis, a series of well-publicized lending and trading disasters, and now saddled with new regulations and capital requirements, once proud American banks have lost much of their luster. The shares of banks like Citigroup and Bank of America Corp. are selling at a fraction of where they were just five years ago, and even the former bastions of Wall Street, Morgan Stanley and Goldman Sachs, no longer have the clout they once enjoyed. With the added uncertainty caused by the ongoing Eurozone crisis, European banks are in even worse shape than their American counterparts.

Amid this turmoil, Chinese financial institutions are becoming more aggressive about expanding outside their home country. Last week, Wang Hongzhang, the Chairman of China Construction Bank, the second-ranked Chinese bank by assets, said in an interview

that CCB is shopping for an acquisition, most likely a bank in Europe with an international presence. “Some of the banks in Europe have been put up for sale,” Wang told The Financial Times. “Now we are looking for the right choice.” Wang said that CCB had RMB 100 billion ($15.8 billion) of capital available to acquire a whole bank or, at a minimum, to buy a stake of 30 to 50 percent in a larger entity.

Europe seems to be a good place to shop for financial assets these days. In July, CITIC Securities Co., Ltd., China’s largest listed securities company by market value, agreed to buy the CLSA unit owned by Credit Agricole S.A. for $1.25 billion, and completed its purchase of a 19.9 percent stake in the Hong Kong-based brokerage firm for $310.3 million. CITIC Securities will buy the remaining 80.1 percent for $941.7 million, subject to conditions including regulatory approval, according to a company statement. Speaking about the CLSA acquisition, Yin Ke, Vice-Chairman of CITIC Securities, said: “It is a shortcut for China’s securities business to expand overseas by acquiring foreign institutions,” and added that the purchase will give CITIC Securities the overseas research component lacking in its current operations.

Despite past resistance from U.S. regulators, China’s banks and financial institutions are also looking to increase their representation in the United States, the world’s largest market for financial services. In May, the Federal Reserve Board approved plans by three state-backed Chinese banks to expand in the U.S., including the first acquisition of a U.S.retail-banking network by a state-owned Chinese lender.

In the largest of the approvals granted, the Fed gave its approval to Industrial & Commercial Bank of China Ltd., one of the world’s largest banking companies with $2.5 trillion of assets, to buy an 80 percent stake in the U.S. subsidiary of Bank of East Asia, a Hong Kong company that has 13 branches in New York and California. ICBC is seeking to more than double its share of profits coming from overseas operations in the next five years, from the current 4 percent to 10 percent. 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.

The Fed approvals given in May represent a sharp reversal from past policy. In November 2009, the Fed denied a bid by China Minsheng Banking Corp. Ltd., a private Chinese bank, to acquire United Commercial Bank (UCB) before U.S. authorities closed the San Francisco-based lender. Regulators had shut down UCB in early November due to massive loan losses and misstated financial reports. According to a source close to Minsheng, the Federal Reserve rejected Minsheng’s proposal because of regulatory restrictions on foreign investment in U.S. banks. Minsheng’s bid could have saved the U. S. government $1.7 billion, between the nearly $300 million of TARP funds and $1.4 billion of losses taken by the Federal Deposit Insurance Corp.

With the global financial services industry in need of a new source of capital, Chinese financial institutions may now have a golden opportunity to significantly expand their global footprints. Look for more cross border deals to come.

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