China goes shopping

China finds US banks on the bargain aisle.

Now that US banks are trading lower due to the sub-prime debacle, foreign investors are buying exposure to the US financial markets. It remains to be seen if the lower valuations are due to an over-reaction to a small segment of the riskiest loans or just the tip of the iceberg. The problem is that we don't know how much bad debt is on the balance sheet of the US banks. China is pursuing their normal cautious route by making small investments in US institutions, Bank of America, Bear Stearns, UCBH. They know a thing or two about bad debt as they have had to inject huge sums of capital into their own state-owned banks to help off-set bad loans to state-owned enterprises. The most interesting part of the story is how the US reacts when the shoe is on the other foot.

In the November 5 issue of Business Week :

"This strategic shift poses a dilemma for U.S. regulators. The Fed must sign off on any transaction in which a foreign investor takes more than a 5% stake in a U.S. bank as well as approve any applications to open branches in the states. When it comes to evaluating Chinese banks, regulators are in uncharted territory. On one hand, the government is supposed to be committed to unfettered cross-border deals; the U.S. certainly agitates for them when American companies try to buy stakes in China. At the same time, Chinese banks operate in a very different regulatory environment—one with a history of lax oversight and corruption. Some observers say that's why the U.S. has dragged its feet on letting Chinese banks set up U.S. branches."

Now that the tables are turned, you have to appreciate the irony. US investors have been clamoring for access to China since it opened up in the 1990's. The Chinese have come to the US to find a place for their cash, but we are not exactly practicing what we preach when it comes to foreign investment in our financial institutions.

"U.S. banks—many of which want more exposure to profitable Chinese markets—could benefit if U.S. regulators are more welcoming to China. Trade rules in China limit foreign investment in its banks to 25%. But China Banking Regulatory Commission Chairman Liu Mingkang has hinted that if his American counterparts approve the applications of Chinese banks to open U.S. branches, China may raise those caps. Says Babak Nikzad, a partner at KPMG's financial-services practice in Hong Kong: "U.S. regulators need to be consistent and see China the way they do other major countries."