Chinese Banks Head for the U.S.

American banks are a bargain these days—and Chinese financial firms with big plans are buying

by Chi-Chu Tschang

When Minsheng Bank started scouting for opportunities outside China's borders this summer, San Francisco's UCBH Holdings (UCBH) seemed like a perfect fit. UCBH, which serves Chinese-Americans, needed $205 million for an acquisition. Meanwhile, China's eighth-largest bank found a potential partner with expertise in private banking and risk management. On Oct. 8, Minsheng agreed to buy a 9.9% stake in UCBH—marking the first such move by a Chinese bank on U.S. soil. "This is the best time to invest in American banks," says Hong Qi, an executive vice-president at Minsheng Bank. "It's cheaper."

Flush with cash from going public and from strong growth at home, Chinese banks are now eyeing the U.S. It's part of a broader push to become global titans offering a wide range of financial services. Top banks Industrial & Commercial Bank of China (ICBC) and China Merchants Bank applied with the Federal Reserve to open stateside branches this year but haven't been approved yet.

The subprime mess, which has crushed U.S. bank stocks, is spurring more activity. Just weeks after the Minsheng deal, Citic Securities struck a deal for a roughly 6% stake in troubled Bear Stearns (BSC) for $1 billion.

This strategic shift poses a dilemma for U.S. regulators. The Fed must sign off on any transaction in which a foreign investor takes more than a 5% stake in a U.S. bank as well as approve any applications to open branches in the states. When it comes to evaluating Chinese banks, regulators are in uncharted territory. On one hand, the government is supposed to be committed to unfettered cross-border deals; the U.S. certainly agitates for them when American companies try to buy stakes in China. At the same time, Chinese banks operate in a very different regulatory environment—one with a history of lax oversight and corruption. Some observers say that's why the U.S. has dragged its feet on letting Chinese banks set up U.S. branches.

The regulatory hurdles certainly influenced UCBH's decision. The bank originally considered deals with three Chinese financial institutions, including state-owned Ping An Insurance. In the end, UCBH executives opted to team up with Minsheng in part because the privately owned bank had limited ties to the Chinese government and therefore had the best chance of getting past the Fed. UCBH and Minsheng say they have gotten a verbal agreement from the Fed but are still awaiting final approval.

China's growing interest comes at a time when investors across the globe are snapping up U.S. banks, spurred partly by the weak dollar. In September, Toronto-Dominion Bank (TD) bought Commerce Bancorp (CBH), and Royal Bank of Canada (RY) acquired Alabama National BanCorporation (ALAB). In August, Banco Bilbao Vizcaya Argentaria (BBV) closed a deal to buy Compass Bank. Today, eight of the 25 largest bank-holding companies in the U.S. by total deposits are owned by foreign companies—double five years ago.

GLOBAL EMPIRES
Chinese banks are hoping to muscle their way on to that list. If they do, it will mark a dramatic change from just a few years ago. Decades of centralized economic planning had left China's state-owned banks crippled by troubled loans, corruption, and other issues. When China joined the World Trade Organization in 2001, the country moved to clean up its banks and privatize them. That prompted a flood of investment by Citigroup (C), Goldman Sachs (GS), and other leading Wall Street firms hoping to cash in on China's booming economy. The Chinese, desperate to soak up knowledge, welcomed them.