Five Reasons China's Banks Are Not Taking Over The U.S. Banking System
The Federal Reserve’s decision this week to green light the expansion plans of three massive state-owned Chinese banks, including the first-ever takeover of a group of U.S. bank branches by a Chinese lender, got tremendous media attention and seemed to play into general fears about China flexing its muscles in America’s backyard.
But while China’s big banks and some parts of China’s government appear to be trying to play a bigger role in the global financial system, China’s banks will not play a meaningful role in the U.S. any time soon. Here are five reasons why:
1. China is going through its once-in-a-decade power transfer and things are not going smoothly. The Chinese Communist Party is dealing with the downfall of Bo Xilai, being embarrassed by a single blind activist, Chen Guangcheng, and an economy that might require more government spending to keep humming. This is not the time in Beijing for a big U.S. banking push.
2. China’s banks really don’t know how to operate in foreign markets like the U.S. They lack the manpower to adequately staff U.S. branches and assess credit risk. It will take a very long time for them to build up these capabilities.
3. Industrial & Commercial Bank of China might be the world’s most profitable lender, but its deal for 80% of the U.S. unit of Bank of East Asia is tiny. It’s a $140 million transaction and the whole retail network ICBC is acquiring has less than $800 million in assets. This is a symbolic gesture at best and totally meaningless to ICBC, which has $2.5 trillion in assets.
4. China’s banks are huge and very profitable, but it’s unclear that they are strong enough for a big U.S. move. Carl Walter, who spent 20 years manning banking outposts in China for companies like JPMorgan Chase & Co., recently even said that “their capitalization is insufficient to move from where they are now to something else.” China’s banks will soon have to deal with the fall out from the $3 trillion in loans they put into China’s economy on the government’s orders following the financial crisis. And Walter likes to remind people that China’s banking profits are artificially generated by government-administered interest rates and the fact that China’s savers have nowhere else to put their money.
5. There is a growing domestic backlash against China’s big banks in China that will both limit their growth and force them to lend more domestically to Chinese entrepreneurs in the private sector. China’s big banks have shunned the nation’s own entrepreneurs, resulting in a huge and highly-priced gray lending market in China. Wen Jiabao himself, China’s outgoing Premier, complained in April that China’s banks make money “far too easily” and should be broken up. “To allow private capital to flow into finance,” he said, “basically we need to break up the monopoly.”
China’s big banks will try to follow their customers, Chinese companies, in foreign markets like the U.S. and provide them with financing. To be sure, Jamie Dimon and even Vikram Pandit are not worrying about competition in America from China’s banks.http://www.forbes.com/sites/nathanvardi/2012/05/10/five-reasons-chinas-banks-are-not-taking-over-the-u-s-banking-system/