China, US working on banking deal

PUBLISHED : Tuesday, 17 November, 2009, 12:00am
UPDATED : Tuesday, 17 November, 2009, 12:00am

Chinese and American financial officials are working on a preliminary agreement to encourage mainland lenders to buy into small and medium-sized US banks, and are hoping to announce the deal during US President Barack Obama's current visit to China, according to mainland bankers who have been briefed about the matter.

The memorandum of understanding (MOU) is part of a new strategic framework that Beijing and Washington are likely to announce before Obama leaves tomorrow, covering subjects from climate change to trade and international issues.

The MOU, if announced, would signal a significant turnaround of Washington's stance towards Chinese investment in the US and also comes at a time that cash-rich China, with more than US$2 trillion worth of foreign exchange reserves, is buying overseas assets aggressively.

Until recently, Americans had been wary of investments from state-controlled Chinese companies in sectors such as traditional banking or energy. In 2005, the China National Offshore Oil Corp's US$18.5 billion investment in the US oil company Unocal failed, largely because of political opposition, and even last year, American regulators reportedly withheld approval of banking licences for the two top mainland banks apparently because of concerns over the role of the China Investment Corp, the country's sovereign fund.

But the situation has begun to change in the aftermath of the global financial crisis, which has badly hit the American banking sector, particularly the small and medium-sized lenders. About 120 US banks struggling to clean up their balance sheets have closed this year.

Mainland bankers briefed on the situation said the US wanted more Chinese investment in the banking sector because its economic recovery was not yet on a solid footing. Chinese investment could help integrate the two economies more closely and stabilise the recovery process.

Meanwhile, mainland companies have begun to pick up the pace of investment in the US. Earlier this month, the CIC agreed to invest US$2.15 billion in US power company AES.

However, the chance of both sides reaching an agreement before Obama completes his maiden visit to China remains uncertain. Chinese lenders have become wary of Western banks in the wake of the financial crisis. China Minsheng Banking Corp, which plans to raise up to US$4 billion by selling shares publicly in Hong Kong, reported a loss of US$120 million on its investments in failed US lender UCBH Holdings. The big San Francisco bank with a branch in Hong Kong and a subsidiary in Shanghai was closed by California regulators earlier this month.

'The US side is very keen for the mainland banks to invest, but we are very cautious,' said a senior banker who sits on the board of one of the smaller mainland banks. Instead, mainland banks appear to be more interested in the Asia-Pacific region and developing countries.

China Construction Bank chairman Guo Shuqing said earlier this month that while the bank was interested in overseas acquisitions, it was less interested in banking assets in the US or Europe, where growth potential was limited.