China banks miss out on US investment banking bonanza

NEW YORK • 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 economy.

Industrial and Commercial Bank of China, Bank of China, Agricultural Bank of China and China Construction Bank all have the country's sovereign wealth fund, China Investment Corp (CIC), as the main shareholder.

US rules require the controlling shareholder - or CIC in this case - 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.

The set-up 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 laundering laws.

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 US 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 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 last year, their assets in the US soared by more than seven times to US$126.5 billion (S$176.2 billion), Fed data showed.

Beijing so far has given no indication that 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... control those institutions for their domestic purposes and I think that limits their ability to go international," said senior fellow David Dollar of the John L. Thornton China Centre at the Brookings Institution.

"If those big banks really want to go international, I think China has to privatise them," he added.


A version of this article appeared in the print edition of The Straits Times on April 27, 2017, with the headline 'China banks miss out on US investment banking bonanza'. Print Edition | Subscribe