Obama Invites Chinese Banks to Buy American

President Obama may return from his trip to China this week with some sorely needed help for ailing U.S. banks: buyers.

The South China Morning Post reports today that American and Chinese government officials are negotiating an agreement to spur lenders in the People’s Republic to acquire small and midsize banks in the U.S. (registration required). The sides hope to announce the deal before Obama wraps up his visit on Wednesday.

The [agreement], if announced, would signal a significant turnaround of Washington’s stance towards Chinese investment in the U.S. 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.

“Turnaround” is putting it mildly. The U.S. has tied itself in knots in recent years fending off Chinese companies eager to buy American enterprises. Most notably, when Chinese state-owned oil company CNOOC in 2005 bid $18.5 billion in cash to buy California’s Unocal, American lawmakers erupted. Dangerous to national security! A giveaway of vital natural resources! Those people eat chicken feet! (For the record, they’re delicious.)

The Committee on Foreign Investment in the United States, a multi-agency government panel that assesses cross-border mergers, eventually nixed the deal. Grandstanding pols may have been pleased, but Unocal shareholders probably weren’t — CNOOC’s offer easily topped a rival bid for Unocal by another American oil company, Chevron, which eventually walked away with the prize. Chinese telecom gear maker Huawei last year abandoned a joint deal for 3Com merely on the risk that CFIUS might block the transaction.

Such flaps recalled concerns about Japanese investment in the U.S. in the 1980s (U.S. authorities went so far as to make it harder for Japanese corporate employees to get visas to work stateside.) Such episodes reveal growing American anxiety about challenges from powerful economic rivals, as well as our place in a multi-polar world. An important difference, however, is that while Japanese companies work hand-in-hand with their government, many of China’s large enterprises work hand-in-fist as state-controlled entities.

Another contrast has to do, of course, with the countries themselves. Japan Inc., mired in its “lost decade,” soon fizzled. But China, while certain to see many ups and downs in coming years (especially on the political front), is a budding superpower. And the country’s rise is surfacing a deep American ambivalence toward China over whether it is best viewed as a free-market friend or a Cold War-era foe.

Certainly, China’s involvement in the U.S. economy is double-edged. Beijing’s taste for Treasury securities and other U.S. debt has kept the American economy afloat. But as our trade deficit shows, it has also encouraged us to live well beyond our means. More broadly, the huge inflows of foreign capital in the U.S. that began in the mid-’90s facilitated the ensuing financial bubble by depressing interest rates.

Despite such concerns, there’s a strong economic case for inviting Chinese banks to enter the U.S. (In the interest of semi-brevity, I’ll withhold my opinion on how China’s human rights record should figure in the matter.) For one thing, they’re already here. Minsheng Bank bought a roughly 10 percent stake in San Francisco’s UCBH Holdings, which operated the United Commercial Bank, in 2007.

Notably, Minsheng, which has more $130 billion in assets, isn’t state-run — in 1996 it became the first private commercial bank in China. The company emerged from banking reforms instituted by Chinese authorities in the 1990s to modernize the country’s financial system. Other changes, prompted in part by China’s joining the WTO, included the adoption of market-based interest rates and a move to loosen control on foreign exchange.

Foreign banks have been making acquisitions in China for a while now. The biggest such investor is HSBC. By 2008, the U.K. financial giant had spent $5 billion to buy stakes in a range of mainland companies, including Bank of Shanghai and Ping An Insurance. In 2007, HSBC formed HSBC Bank (China) in Shanghai as a wholly foreign-owned bank.

Citigroup, whose business on the mainland dates back to the early 1900s, owns a nearly 20 percent stake in Shanghai Pudong Development Bank, just below a government limit on foreign ownership of domestic banks. Citi also has a piece of Guangdong Development Bank. In addition, four major Chinese banks — the Bank of China, Bank of Communications, China Construction Bank, and Industrial and Commercial Bank of China — have attracted a slew of overseas investors.

For now, the growth of Chinese banks in the U.S. is unlikely to provoke the same hand-wringing as CNOOC’s designs on the American oil patch. The agreement being hatched between Washington and Beijing concerns smaller banks, not global ones. More important, the U.S. desperately needs willing buyers to mop up injured banks, more of which fail every week. The federal Public-Private Investment Program, which is aimed at helping banks cleanse their portfolios of toxic assets, is only slowly gaining speed. U.S. banks and investors are moving in, but not quickly enough.

If Chinese financial companies pass on the chance to buy American, it’s unlikely to be because of nationalist sentiment here at home. That’s passing. Recently, for example, China’s sovereign wealth fund bought a $2.2 billion stake in Virginia energy company AES, with nary a whimper from Congress.

Rather, it will stem from a healthy sense of caveat emptor. United Commercial Bank closed earlier this month, taking Minsheng Bank’s investment down with it. As one Chinese banking executive told the Morning Post, “The U.S. side is very keen for the mainland banks to invest, but we are very cautious.”