China Merchants Bank Vaults into U.S.

It will be the first Chinese bank to do business in the States after a 15-year exclusionary policy recently reversed by the Fed.

The Federal Reserve gave China Merchants Bank the nod on Thursday to open a full-fledged banking branch in New York, becoming the first Chinese bank in 15 years to be granted that privilege. The proposed branch would engage primarily in wholesale deposit-taking, lending, trade finance, and other banking services.

As CFO magazine reported in its November issue, the Federal Reserve has been evaluating applications from China Merchants Bank and the Industrial and Commercial Bank of China (ICBC) to open branches in New York. The New York State Banking Department approved China Merchants for the requisite state-level license in August. There has been no reported action on ICBC’s bid, but an official of the China Banking Regulatory Commission said Thursday that its U.S. application would be approved “very soon.” China Construction Bank Corp. reportedly also plans to apply for U.S. entry.

The exclusion of Chinese banks dates to 1991 and the passage of the Foreign Banks Supervision Enhancement Act, which brought greater federal oversight to foreign banks operating in the United States after a number of fraudulent or unsound banking practices were uncovered. Since then, ongoing concerns about the poor quality of Chinese banks’ loan portfolios (including excessively large exposure to business loans), the laxity of their risk-management practices, and the inability of the China Banking Regulatory Commission to rein in fraud have prevented any reconsideration.

In approving China Merchants’s application, the Federal Reserve highlighted the progress that Chinese banking regulators have made to enhance their anti-money-laundering regime. In addition, the Fed said China Merchants “has put in place policies, procedures, and controls to ensure ongoing compliance with all statutory and regulatory requirements, including designating anti-money laundering officers and conducting employee training at the head office, branch, and sub-branch levels.”

The sixth-largest bank in China, with $146 billion in assets, China Merchants is a joint stock bank, which means it has been under less government control. That’s in stark contrast to ICBC, which still resembles a government bureaucracy, May Yan, a Moody’s banking analyst based in Hong Kong, told CFO in September. China Merchants “knows how to control its risk because it has had to survive on its own,” she said. ICBC is still in the early stages of developing its risk-management and corporate-governance practices.

Given their huge capital bases, Chinese banks “eventually will be very significant players,” says David Kenny, a partner with Squire, Sanders & Dempsey LP.

The Fed’s move may also open the door for talks with China on allowing U.S. and other foreign banks to take larger stakes in China’s domestic financial institutions. In recent weeks, Chinese banking officials had pointed to China Merchants’s pending application as a roadblock to revising some of its financial-market policies that limit foreign investment. Currently, for example, foreign investors can own only up to a 25 percent stake in Chinese banks.

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