ICBC's US ambitions

Given the timing of Industrial and Commercial Bank of China's offer to buy 80% of Bank of East Asia's US unit for $140 million, it should win regulatory approval.

In a perfectly politically timed manoeuvre, just after the conclusion of President Hu Jintao’s four-day visit to the US with President Barack Obama, the Industrial and Commercial Bank of China announced that it has agreed to the first Chinese takeover of a US retail bank.

ICBC has agreed to buy 80% of Bank of East Asia’s US unit for $140 million, pending regulatory approval in both countries.

Nice timing, that. Surely Beijing-based ICBC, the world’s biggest lender by market value, didn’t make the decision without consultation with political advisers who must have virtually assured approval in China – and with advisers who suggested it would likely fly in America.

From a purely regulatory standpoint, the US Federal Reserve will need to reach the decision that China’s banking regulators adequately supervise their banks. It’s easy to imagine there will be political lobbying for the Fed NOT to make that call. Pressure won’t just come from lobbyists seeking to continuously portray China as the bogeyman who stole manufacturing jobs but also from those who would like to portray the Hu-Obama summit as a farce.

At the joint press conference with Obama and Hu on January 19, Obama said: “The positive, constructive, cooperative US-China relationship is good for the United States”. He also said: “Cooperation between our countries is also good for the world.” And then this cheerleader special: “As we look to the future, what’s needed, I believe, is a spirit of cooperation that is also friendly competition”.

No one should seriously put too much stock in such airy-fairy lines, as they are just that, political rhetoric with loads of room to manoeuvre. But you can be assured that if the Fed blocks the deal, Obama will be made to eat those words. And politics in America these days is all about blocking successful, smart plans, so that your opponent cannot take credit for having achieved something. Never mind what’s good for the country (and the world). That’s not the aim. And yes, the Fed is part of this political arena. The way the financial crisis was handled was proof of that.

So although deals worth $25 billion were reportedly being agreed among US and Chinese companies during Hu's visit, that doesn’t mean they will all come to fruition.

The deal

If approved, ICBC will get 10 branches in California and three in New York -- ideal locations as both states have large Chinese-immigrant populations who do overseas transfers back to Asia and would likely prefer to put their money in a bank whose name they recognise. Indeed, the greater New York metropolitan area (including New Jersey, Connecticut and Pennsylvania) is home to the largest Chinese-American population (roughly 666,000 people), according to data based on the 2009 American Community Survey Census. This wouldn't count illegal immigrants. California is home to the second-largest population of Chinese-Americans.

That said, bear in mind that the reported net income of Bank of East Asia's US subsidiary was $1.9 million in the quarter ending September 30, according to regulatory data. It had total assets of $717 million and deposits of $425.2 million. As it stands, this isn’t a business that’s going to fundamentally rock ICBC’s own earnings reports.

But this is not about size – it’s about ICBC’s global ambitions, which are growing. In September 2008 ICBC opened a branch in New York, (which required Fed approval -- so that's a good sign) and it has branches in nine countries in Europe. In 2009 it reached a different agreement with BEA, to acquire a 70% stake in BEA's Canadian unit, giving it control of the bank. In July 2010, it changed the name of that unit to ICBC Canada, which ICBC said in a statement was a “business platform for ICBC to tap into the Canadian market, along with the New York Branch [that] is shaping up ICBC's North American presence”.

This latest proposed acquisition is a reasonable market for ICBC to target, and it’s unrealistic for the Fed to think that US multinational banks should be able to operate in the mainland without a quid pro quo agreement. The thing to watch is if “reasonable” comes into play when it comes to regulatory approvals.

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