Chinese banks have an appetite for global expansion

Moves by China Minsheng Bank and China Marchants Bank to establish a presence in the US is the continuation of a recent expansionary trend, says Moody's report.
The expansion of Chinese banks has gained momentum with the recent entry of China Minsheng Bank and China Merchants Bank into the US market, according to a global banking report released by MoodyÆs yesterday. China Minsheng is buying a stake in United Commercial Bank, a small local US bank, while China Merchants has won government approval to set up a branch in New York City.

The move illustrates the increasing trade and investment flows between China and the US and comes amid a growing interdependence and strengthening economic relationship.

Bilateral banking assets more than tripled to at least $31 billion between December 1997 and June 2007. ôMost importantly,ö says the report, ôbilateral banking growth since the middle of 2003 has exceeded the expansion in bilateral trade, highlighting the strengthening financial ties linking the two countries.ö

US expansion will help Chinese banks diversify earnings and gain exposure to a more advanced capital and banking market. However, bilateral banking between the US and Asia still remains low compared to other US trading partners, except Mexico, and a foothold in the US will be key for Chinese banks to access intermediate trade and investment flows to the US, continues the report.

The overseas expansion of Chinese banks has intensified over the last two years: in late 2006, ICBC acquired a 90% stake of Bank Halim Indonesia, a small Indonesian Bank, while China Construction Bank purchased Bank of America (Asia), a small bank with operations in Hong Kong and Macau.

Furthermore, last month ICBC announced plans to buy a 20% stake in Standard Bank Group in South Africa for $5.5 billion.

Figures from the China Banking Regulatory Commission show that ChinaÆs five largest commercial banks had operations in 29 countries, including 31 subsidiaries, 47 branches and 12 representative offices at the end of 2006.

Regarding the banks' latest expansion into the US, Moody's warns: ôOther banks which have expanded before into the US have realised these benefits, but it is a long-term process best accompanied by strong risk management controls and a thorough understanding of the differences in operating environments.ö

The ratings agency believes that should the Chinese banks fail to fully oversee their foreign banking operations, they may suffer operating losses due to adverse risk positioning. This may also lead to civil or monetary penalties on failures to comply with local laws and regulations.

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