Chinese Banks Head for the U.S.

(page 2 of 2)

Now on better footing, Chinese companies aim to create global empires that go beyond traditional banking. They first moved into other areas and countries where their existing customers did business. That's why China's third-largest bank, CCB, bought Bank of America's (BAC) operations in Hong Kong and Macao last year. Now they're seeking strategic partners from whom they can gain expertise to expand their range of financial services. Minsheng executives were especially intrigued by UCBH's ability to successfully integrate ethnic Chinese and Americans on the same management team. "Chinese banks are trying to come to grips with the wider concept of banking," says Keith Pogson, head of Ernst & Young International's global financial service practice in China and Hong Kong.

And with a bull market powering their shares, Chinese banks have more clout at the negotiating table. China's three biggest banks rank among the top 20 in the world by market value, with ICBC overtaking Citigroup (C) and Bank of America as the largest in July. China International Capital analyst Fan Yanjin estimates that for the 14 banks listed on the Shanghai exchange, the average price-to-earnings ratio is 41.3. That gives them plenty of buying power, especially compared with U.S. rivals' average of 10.6 times earnings.

Of course, just because U.S. banks are more affordable doesn't make them all a wise buy. Overseas banks that pick up U.S. businesses today could get stuck with an unexpectedly large number of bad home and other loans. That might derail the growth strategies of Chinese banks, which have spent most of the decade trying to work through their own passel of troubled loans. "In the current environment, you would have to be extremely brave or extremely stupid to buy a U.S. bank," says Pete Hahn, a fellow at City University's Cass Business School in London.

Still, the easiest and quickest way to gain a foothold in the U.S. is by partnering with local players. U.S. regulators may be nervous about approving recent applications from Chinese banks to set up branches, in part because of a 2002 scandal in which a New York branch of Bank of China improperly made loans. U.S. and Chinese regulators later fined the bank $20 million. "In the past we may have had our problems, but now the situation has completely changed," CCB Chairman Guo Shuqing told reporters at the 17th Party Congress in Beijing on Oct. 17. "Yet the U.S. has still not changed its attitude. It's unfair."

U.S. banks—many of which want more exposure to profitable Chinese markets—could benefit if U.S. regulators are more welcoming to China. Trade rules in China limit foreign investment in its banks to 25%. But China Banking Regulatory Commission Chairman Liu Mingkang has hinted that if his American counterparts approve the applications of Chinese banks to open U.S. branches, China may raise those caps. Says Babak Nikzad, a partner at KPMG's financial-services practice in Hong Kong: "U.S. regulators need to be consistent and see China the way they do other major countries."

With Dawn Kopecki in Washington and Mark Scott in London