Chinese versus U.S. Banking Industries: Collaborate and Win

Chinese Versus U.S. Banking Industries: Collaborate and Win

In May the U.S. Federal Reserve approved the first acquisition of a U.S. bank by a stateowned Chinese bank. The Industrial and Commercial Bank of China, the largest bank in China according to asset value and called the “best bank in China” by Euromoney, acquired an 80 percent stake in the U.S. arm of the Bank of East Asia. Despite the modest transaction value of $140 million, the approval caused a stir in the United States. Critics voiced their concerns that ICBC represented “Chinese interests” rather than the interests of a purely commercial bank. ICBC was 70.7 percent owned by the Chinese government.


‘Reciprocal’ act at best

The deal was significant since it was the first time that a state-owned Chinese bank had taken a controlling interest in a U.S. bank. Yet, the deal remained symbolic and was partially a political and reciprocal arrangement. The timing of the acquisition coincided with some high-level political and economic dealings between the two countries. For instance, the deal was signed, among a pack of some 60 agreements, in Chicago in January 2011, on the last day of Chinese President Hu Jintao’s state visit to the United States. Two months later, it was approved by the China Banking Regulatory Commission, which carries the primary responsibility for the supervision and regulation of Chinese banking organizations.

But it was not until May 2012 that the deal was approved by the Fed (the U.S. counterpart of the CBRC), after a lengthy (13 months after it was filed) and frustrating regulatory review, coupled with pressure from Chinese regulators. The approval also came a few days after the U.S.-China Strategic and Economic Dialogue and together with the Fed’s approval for two other Chinese banks (Bank of China] and the Agricultural Bank of China) to open their respective branches in the United States.

The nature of the transaction was neither ‘controversial’ nor ‘significant, as the transaction value was modest. Second, Bank of East Asia USA was essentially the subsidiary of a foreign bank and was relatively small. Its total consolidated assets were only $780 million (as compared with $2.5 trillion for ICBC). Its geographic coverage in the United States was also limited, since it operated 13 branches in New York and California. BEA-USA primarily served the Chinese population in the United States and specialized in Sino-U.S. trade.

Third, BEA-USA was primarily engaged in traditional retailing and commercial banking activities in the United States. Fourth, ICBC was a qualifying foreign banking organization and had already had a physical presence in the United States through its New York branch and its U.S. broker-dealer subsidiary. Last, ICBC had also acquired a 70 percent stake in BEA Canada in 2010 and had successfully integrated that institution into its own operations and risk management systems.

Profound implications

The acquisition signified the Fed’s improved confidence in the Chinese banking industry. The deal was carefully scrutinized by U.S. regulators, especially with respect to competitive considerations and comprehensive and consolidated supervision by Chinese regulators, including anti–money-laundering procedures. The approval followed a positive review of Chinese banking supervision by the International Monetary Fund and the World Bank, and it signified the Fed’s recognition that Chinese regulation and supervision had met certain standards, as well as recognition of the reliability and accuracy of Chinese accounting methods at the largest Chinese banks such as ICBC.

The approval also implied that there would be possible assent for future acquisitions, even though the Fed had made it clear that the approval was only specific to ICBC. Thus, the acquisition may spur future deal making for Chinese financial institutions that are looking to gain a foothold in the United States. However, the question remains whether the Fed would have completely different considerations if a large U.S. bank were the acquisition target.


There may be a lack of understanding as to why Chinese banks are expanding overseas and how they have come to do so.

Big, but yet to be ‘globally systemically important’

The Chinese banking industry is the third largest banking industry in the world (after the United States and Japan). Four of the top 10 largest banks in the world according to market capitalization, including the top two largest banks, are Chinese. ICBC, for instance, is not only the world’s largest bank according to market capitalization, but also the most valuable financial institution brand (according to a study of the top 100 most valuable brands by Millward Brown, a research agency and part of the communications group WWP).

Nevertheless, Chinese banks are still largely confined to doing business in the domestic market and have not been designated as being “globally systemically important” by the Basel Committee on Banking Supervision.

Following the money flow

In recent years, the Chinese government has encouraged Chinese companies to expand overseas. The direct impact is two-fold. First, there is a need for Chinese banks to better support the overseas expansion of Chinese companies, and second, there is the danger of potentially losing customers to U.S. or other international banks that already have a global network. Therefore, the China Banking Regulatory Commission has continued facilitating the “going global” of Chinese banks.

Essentially, Chinese banks are building up a global footprint to follow their customers: Chinese companies that are expanding overseas. Chinese banks are actively expanding their overseas outreach with the aim of constructing a global service network that is suited for the current stage of China’s economic globalization. At the end of 2011, the policy banks1 (the Export-Import Bank of China and the Agricultural Development Bank of China) and China Development Bank had set up six institutions overseas and had invested in two overseas banks; five large commercial banks had set up 105 banking institutions overseas and acquired or invested in 10 foreign banking institutions; eight small- and medium-sized commercial banks had set up 14 overseas institutions and another two had acquired or invested in five foreign banking institutions.

Opening to international ownership

The internationalization of Chinese banks has taken different forms. Except for organic growth and acquisitions, Chinese banks have speeded up their internationalization by opening up to outside investors through overseas initial public offerings and the expansion of capital replenishment channels. At the end of 2011, five large commercial banks, three joint-stock commercial banks and one rural commercial bank had gone public in Hong Kong.

Foreign banks have also taken part in the process by becoming strategic investors in the Chinese banks before their IPOs. Four of the five largest commercial banks in China (with the exception of the Agricultural Bank of China) introduced foreign strategic investors. Foreign banks invested a combined $22 billion between 2004 and 2006 in Chinese banks. Goldman Sachs, Allianz and American Express acquired a combined 8.45 percent equity stake in ICBC. A consortium led by the Royal Bank of Scotland , UBS and Temasek acquired a combined 16 percent equity stake in Bank of China. Bank of America and Temasek acquired a combined 14.5 percent stake in China Construction Bank, and HSBC took a 19.9 percent stake in Bank of Communications.

In the case of ICBC, strategic investors had formed various alliances with the bank at different stages to help the institution establish certain business practices, particularly those involving risk management, and to enhance its financial performance and efficiency, as well as corporate governance. The investments have paid off. Goldman Sachs, for instance, bought a 4.9 percent share in ICBC for $2.6 billion in 2006. So far, Goldman has doubled its investment through three share sales over the years.

Building an integrated global network

To further expand their service coverage, Chinese banks have strengthened the coordination and mutual support between their onshore and offshore entities. The banks have set up an integrated network that enables the head office, domestic and overseas branches and overseas correspondent banks to interact with and support one another.


The Chinese banking sector has been continuing its “open-up” to foreign competition following China’s accession to the World Trade Organization. Foreign banks have continued making headway in China. More headway than Chinese banks abroad Foreign banks have further increased their network in China. According to the China Banking Regulatory Commission’s 2011 annual report, at the end of 2011, a total of 181 banks from 45 countries and regions had a presence in China.

This total included 37 locally incorporated banks (from 14 countries and regions) maintaining 245 branches. Also included were two Sino-foreign joint-venture banks (maintaining seven branches and one subsidiary), one wholly foreign-owned finance company, 94 foreign-bank branches established by 77 banks from 26 countries and regions, and 209 representative offices in China.

The geographic coverage of foreign banks also expanded from 20 cities at the beginning of 2003 to 50 of 27 provinces by the end of last year. In addition, 125 outlets were set up in central and west China and northeast China. At the same time, a total of six locally incorporated foreign-bank branches were permitted to set up sub-branches in the areas where export-oriented enterprises are intensively located.

A total of 35 locally incorporated foreign banks and 45 foreign-bank branches were approved to conduct renminbi (Chinese currency) business, 25 locally incorporated foreign banks and 25 foreign-bank branches were authorized to engage in derivative transactions and five locally incorporated foreign banks were authorized to issue RMB financial bonds.

The year 2011 was a year of significant growth for foreign banks in China. Record profits of RMB16.73 billion ($2.7 billion2 ) were posted, more than double that of RMB7.78 billion ($1.2 billion) the previous year, while total assets increased by 23.6 percent to RMB2.15 trillion ($341.8 billion).

In addition, foreign-banking institutions in China maintained sound fundamentals, with major indicators above regulatory requirements: liquidity ratios stood at 69.53 percent, non-performing loan ratios registered at 0.41 percent and capital adequacy ratios and the core capital adequacy ratios of locally incorporated foreign banks were at 18.83 percent.

Increasing commitment and support from the head office

An annual survey conducted by PricewaterhouseCoopers on China’s foreign-banking sector, based on interviews with CEOs, senior executives and branch managers of 41 foreign banks in China, indicated that the commitment and support from the head office of foreign banks is now at the highest level since the outbreak of the global financial crisis in 2008.

Foreign banks have steadily increased their investments in China. According to CBRC, more than 40 foreign banks have made additional capital (or working capital) replenishment of the equivalent of RMB27.1 billion ($4.3 billion) in their China operations since 2008. And, for the first time, CBRC allowed foreign-fund banks to increase paid-in capital in RMB, which amounted to RMB7.02 billion ($1.1 billion) in 2011. In addition, the PwC survey also indicates that there are no pressures from head offices to reduce overall costs in China, even though foreign banks are bound to manage costs prudently.

Enhancing quality and competitiveness

Since China’s accession to the WTO, the nation has gradually opened up its banking system to foreign competition with the aim of the comprehensive reform of its own banking system. In particular, Chinese regulatory authorities have used foreign banks as catalysts of banking reform that encourage local banks to adopt good corporate governance and risk management policies. Foreign banks have largely boosted the local financial service capacity in China and contributed to the improvement of these financial services by playing an exemplary role in the business operations and management of local Chinese banks.

Despite many challenges that may limit opportunities for growth, new business opportunities have also arisen for foreign banks that are actively engaged in providing consulting services for local Chinese enterprises seeking to go global and introduce new products and services. Foreign banks remain optimistic about their China business, according to the PwC survey, and many banks predicted revenue growth of at least 20 percent in 2012 and beyond.


Challenges remain for both foreign banks in China and Chinese banks that are going global. Although these challenges may present themselves in different lights, there are some commonalities. Below are some of the common challenges that face both foreign banks in China (such as U.S. institutions) and Chinese banks going global.

The regulatory challenge

The impact of regulation remains the biggest challenge for both U.S. banks in China and Chinese banks gaining a foothold in the United States. This impact can be exemplified by the Fed’s approval of the ICBC deal and the findings of the PwC survey. Yet, perhaps somewhat surprising to many people, the PwC findings also suggested that the policies implemented by the Chinese banking regulator have been more supportive of banks than those imposed in other jurisdictions.

Therefore, instead of viewing regulation as a burden, as some do, banks should proactively engage with the regulators of the hosting country (the United States or China, in this case). In addition, there may be room for collaboration. For instance, U.S. banks can use their lobbying power to help Chinese banks gain more access to the United States and, vice versa, Chinese banks can help U.S. banks further increase their presence in China.

The talent challenge

Industry experts note that Chinese banks can hardly compete with their U.S. counterparts in the United States because of their lack of skilled high-level personnel (talent). Even if they could recruit local talent in the United States, they are unlikely to offer competitive packages. Talent can be bought at a “premium” (as was the case in some recent Chinese acquisitions overseas in which Chinese banks were aggressively acquiring talent by paying high premiums), yet the workers who moved to Chinese banks were not the “top” or “first-rated” of the industry. Chinese banks need to find a way to acquire, develop and retain their own talent and build up their core capabilities in the long run.

In China, according to the PwC survey, the lack of key talent remains a perennial issue for foreign banks and is a constraint that many CEOs believe will significantly affect top-line growth over the next three years. Finding and retaining skilled personnel has become an increasing challenge. Foreign banks continue to believe that they operate as training institutes, as indicated by increasing employee turnover rates. Most foreign banks have lost employees to other foreign banks, and some have even lost employees to other domestic banks. Aggressive recruiting has not been the answer, however, since it has only driven up salaries.

Perhaps talent flows in only one direction (from foreign or U.S. banks to Chinese institutions), as old ways of thinking go. This dynamic could change once the RMB becomes international (that is, once it is fully convertible as an international currency and it becomes a world reserve currency).

The innovation challenge

With more and more Chinese companies venturing overseas, challenges and opportunities exist for both Chinese banks and banks from other countries. So far, Chinese banks that are already in the United States have been well received, partly because of their ability to provide credit to the subsidiaries of Chinese companies in the United States and to medium-sized U.S. companies and multinationals, especially during and after the 2008 global financial crisis.

Still, the presence of Chinese banks in the United States is very limited, and so are the products and services that they can offer. Therefore, banks from other countries are much better positioned to assist Chinese companies that are expanding globally by introducing new products and services, especially those in their home turf.

While foreign banks continue to identify opportunities across the financial spectrum, further deregulation in China will add impetus to their efforts to broaden and expand their activities in the financial markets. For instance, future RMB internationalization and interest-rate liberalization will give rise to a range of new opportunities for foreign banks in China by enabling them to make much wider product offerings. To realize such opportunities, however, foreign banks need to prepare themselves, not only by taking a more focused and strategic approach, but also by developing potential collaboration with their Chinese counterparts.


Keeping the ends in mind

Conventional thinking has it that Western banks are more sophisticated than their Chinese counterparts, despite the fact that the Chinese banking industry came out of the financial crisis almost unscathed (unlike some of their Western peers). As a result, Western banks are still considered by many people as being more superior in China, since they can bring advanced concepts, risk management systems and corporate governance experience. These were, perhaps, some of the main reasons why foreign banks were invited to become strategic investors in Chinese banks and had the chance to buy shares at bargain prices. However, foreign banks were required to commit to certain principles, including long-term involvement and the improvement of risk management and information technology systems. Yet, Western banks such as RBS, BofA, UBS and Goldman Sachs sold part or all of their stakes in Chinese banks in order to replenish their weakened balance sheets or to bolster capital.

Temasek, on the contrary, went against the torrent and stayed consistent with its own underlying growth strategy by investing in growth areas like China and growth sectors like banking. It grasped the opportunities and raised its holdings in several Chinese banks while Western banks divested.

The question is, despite fast and handsome profits, was it really a smart move for Western banks? Perhaps. However, Chinese banks are also quick learners. Agricultural Bank of China, the last of the five largest commercial banks to go public, learned to apply tighter selection criteria to foreign investors and eventually chose to go without any.

Following a long and winding path

Despite a growing international presence, Chinese banks are still at the infant stage of going global. The path has not been all smooth. Bank of China, for example, ended its four-year attempt to establish a private banking operation in Europe in July 2012 by striking a strategic partnership with the Julius Baer bank. Julius Baer would take over BOC’s private banking business in Switzerland. The two parties have also agreed to cross-refer clients to each other — BOC could offer Julius Baer clients and commercial banking services, and Julius Baer could support the international demands of BOC’s private banking clients. Though in theory the cross-referrals may work, the implementation may be a challenge in reality.

Although specific reasons are not attainable, a safe guess would be that the private banking business will remain a difficult territory for Chinese banks, mainly because of their lack of sophisticated products and, more importantly, because of the relationship skills of established players. A lesson to learn, perhaps, for other Chinese banks!


Despite the positive signals associated with the Fed’s approval of ICBC’s acquisition of BEA-USA, there is still clear resistance in the United States against Chinese banks playing a part in the U.S. banking industry. Nevertheless, U.S. banks need to accept the fact that more and more Chinese banks are coming to the United States. As a result, the competitive landscape may be changing.

Over the years, foreign banks have made great progress in China, and they have made notable contributions to the Chinese banking industry. It may still take considerable time for Chinese banks to catch up, build up their capabilities and be able to compete and become “globally systemically important.” Or maybe it is just a matter of time. As Napoleon said, “when the sleeping giant awakes” it will shake the world. Therefore, instead of viewing their Chinese counterparts as a threat, U.S. banks should collaborate with them and achieve a “win-win.”


1 In 1994, the State Council of China established three policy banks to take over the government’s policy lending. The Export-Import Bank, the Agricultural Development Bank and the China Development Bank each had its own distinct function and responsibility within the Chinese developmental model. Over time, however, the government steered the policy banks in a new direction and further expanded the business scope and funding sources for policy banks according to the changing environment and needs of social and economic development. The CBRC urged policy banks to deepen their internal management reform and speed up the segregation of financial accounting between policy-based services and their own commercial businesses. It also encouraged the policy banks to explore market-based measures to strengthen the functioning of policy finance. Arguably, the term “policy bank” no longer describes the business operations these banks engage in.

2 Unless stated otherwise, $1 = RMB6.3009 (middle rate published by the People’s Bank of China on Dec. 30, 2011).