Why a tiny deal by a Chinese bank in America matters
THE price is so trivial it will not have a discernible impact on the buyer, ICBC, the Chinese bank that is the world’s biggest by value. By the time the acquisition is approved, it may well have been forgotten by most outsiders. And yet, it could be a transformative deal whose full implications will take years to emerge.
Almost lost amid the many transactions signed on January 21st to coincide with the visit of China’s President Hu Jintao to America was an agreement by ICBC to buy 80% of the Bank of East Asia’s small, almost profitless, retail-branch network in New York and California for $140m. If approved, the transaction would be significant because for the first time a Chinese mainland bank would have activities operating under America’s regulatory framework. But its importance goes beyond that. A tick in the box by American regulators, expected by the end of the year, would mean that they have endorsed the soundness of China’s government controlled and politically directed banking system. That has been a barrier to Chinese banks expanding in America.
In recent years American supervisors have stopped short of granting full approval for Chinese firms, instead allowing them only to provide wholesale services to companies. Even then, in at least one case, supervisors have insisted that the permit be contingent on further improvements in the Chinese firm’s operating procedures. A licence for a retail operation must pass a higher threshold since local branches will be covered by America’s deposit-insurance umbrella. That, in turn, involves approving not only the operations of the bank that is entering America but also its home regulator, to ensure it is shipshape—in the jargon, that it can provide “consolidated comprehensive supervision”. In theory, the Federal Reserve’s examiners will now need access to the operations not only of China’s largest bank but of its regulators.