(Repeats for wider distribution)
By Koh Gui Qing
NEW YORK, April 26 As scores of investment
bankers profit from the fee bonanza offered by Chinese companies
hunting for deals in the United States, one group is
conspicuously absent - Chinese banks.
Despite their deep ties with Chinese firms, the country's
largest state-owned banks are missing out on the hundreds of
millions of dollars that Wall Street banks and their European
rivals earn advising Chinese companies on acquisitions and share
and debt sales.
What is holding the banks back is the way Beijing controls
the top lenders to manage the supply of credit to the Chinese
Industrial and Commercial Bank of China
, Bank of China , Agricultural
Bank of China , and China Construction Bank
all have China's sovereign wealth fund,
China Investment Corp (CIC), as the main shareholder.
U.S. rules require the controlling shareholder - or CIC in
this instance - to seek Federal Reserve clearance for investment
banking operations. This poses a big hurdle to Chinese banks as
they would need to coordinate their applications despite having
separate managements and strategies, said a banker with a
Chinese lender in New York. He declined to be named due to
sensitivity of the matter.
The setup means the four banks are only as strong as their
weakest link and two of them come with significant baggage,
having drawn Fed scrutiny over enforcement of anti-money
The Federal Reserve declined to comment and the CIC and the
"big four" banks were not immediately available for comment.
"We've hit a bottleneck," said another banker at a Chinese
lender in New York. "As a commercial bank, we've done all we are
meant to do. Why don't we become an investment bank ourselves?"
Without changes that would allow Chinese banks to act
independently, or an agreement with the Fed to make an exception
for them, those keen to expand in the United States will be in a
limbo, that banker said.
Lending titans at home, the "big four" have invested in
boosting their profile in New York. Industrial and Commercial
Bank of China, for example, has an office in Trump Tower on
Fifth Avenue, while Bank of China occupies a new mid-town
Manhattan office tower it bought in 2014. They take deposits
from savers and businesses and provide trade financing and
foreign exchange trading services. Between December 2010 and
September 2016, their assets in the United States soared over
seven times to $126.5 billion, Fed data showed.
Beijing so far has given no indication it is ready to relax
its grip for the sake of overseas growth, even though some say
state divestiture is the ultimate solution.
"The leadership of China faces a choice. They control those
institutions for their domestic purposes and I think that limits
their ability to go international," said David Dollar, a senior
fellow in the John L. Thornton China Center at the Brookings
"If those big banks really want to go international, I think
China has to privatise them," he said.
The stakes are high.
Last year, Chinese companies raised over $22 billion in U.S.
debt and stock markets, up 28 percent from 2010 and 12 percent
higher than in 2015. The value of mergers and acquisitions
involving Chinese firms soared to almost $27 billion last year
from a previous high of $3.6 billion reached in 2013. (Graphic:
To get a slice of that investment banking business, any
foreign institution needs the Fed's recognition as a "financial
holding company" that is "well capitalised" and "well managed,"
according to the Fed's website.
That poses a challenge for all four because the Fed took
enforcement action against China Construction Bank in 2015 and
Agricultural Bank of China last year for not doing enough to
fight money laundering, according to the Fed's website.
The central bank did not detail the banks' problems. But
when New York's financial regulator in November fined
Agricultural Bank of China $215 million for violating anti-money
laundering rules, it cited "alarming" transactions including
"unusually" large payments from Yemen to the southern Chinese
province of Zhejiang.
Public records showed the Fed has not raised similar
concerns about the Industrial and Commercial Bank of China and
Bank of China so far.
A person familiar with the Fed's thinking said the
regulators believed Chinese banks should focus on tightening
their procedures before expanding their U.S. businesses.
The person, who declined to be named due to the sensitivity
of the matter, said the Fed would never grant the "financial
holding company" status to any bank with unresolved regulatory
Chinese banks have argued, without success, against being
treated as one entity, the banker and the source familiar with
the Fed's thinking said.
Now, bankers in New York plan to analyse the costs and risks
of expanding into investment banking and present the findings to
their respective boards in China, the banker said.
If the banks' headquarters in Beijing find the business
worth pursuing they will conduct their own due diligence and
start consulting various Chinese regulators on ways to overcome
the regulatory hurdles, the banker said.
Despite the challenges, the "big four" clearly has
investment banking ambitions. All four have investment banking
arms in Hong Kong or mainland China that target Asian deals.
U.S. expansion would be the logical next step given that Chinese
companies will continue investing overseas in search of growth
opportunities and new technology, the banker said.
"Should Chinese banks continue to miss out on this
opportunity? That's the question we should ask," said the
(Reporting by Koh Gui Qing in New York; Additional reporting by
Olivia Oran in New York and Ryan Woo in Beijing; Editing by Greg
Roumeliotis and Tomasz Janowski)