In the Red: Chinese Banks Moving Into U.S. Market

The unprecedented Chinese move into the banking industry means new markets, investment.

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For the first time in its history, the Federal Reserve has cleared a Chinese state-controlled bank to take over a U.S. bank, and it may come not a moment too soon.

This week, the Fed approved the Industrial and Commercial Bank of China's purchase of an 80 percent stake in the U.S. subsidiary of the Bank of East Asia. In addition, the central bank approved applications from Bank of China and Agricultural Bank of China to open branches in Chicago and New York, respectively.

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"It's amazing how the Fed did a 180 on this," says Ken Thomas, an independent bank analyst and economist, in reference to 2009, when the U.S. government blocked Chinese bank Minsheng in its attempt to buy a failing United Commercial Bank, located in San Francisco. Now, he believes, the Fed has come to its senses. "China is where the money is right now. So why would you say no to them coming here and making the system stronger that way?"

While some in the U.S. applaud the new foreign investment, it's also a boon for Chinese banks, having gained an opening into a new market.

"This unprecedented acquisition of a controlling stake in a U.S. commercial bank by a mainland bank is strategically significant," said ICBC chairman Jiang Jianqing, as quoted by Chinese news service Xinhua.

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It can sound jarring to an American: a bank from a communist country taking over U.S. bank branches, with other firms making further moves into the banking industry. But the ICBC approval does not mean a massive shift in the U.S. banking system. For example, the purchase was only a $140 million transaction—a pittance for a bank with $2.5 trillion in assets.

However, the move is still meaningful, though its limited scope means it will be very useful for particular customers, while most Americans will hardly notice the difference.

"[Bank of East Asia] has 13 branches, in mainly Asian-American communities around the country," says Thomas. In acquiring the branches, ICBC will be able to better serve and target Chinese and Chinese-American customers and businesses, he says. "Anybody can go into the branch, but in reality the neighborhood is Chinese or Chinese-American."

So even within these relatively small communities, the banks may have a strong pull.

The Fed's decision indicated that the central bank closely scrutinized the Chinese banking system in allowing the takeover: "[A]uthorities in China have continued to enhance the standards of consolidated supervision to which banks in China are subject," it said, also noting that the IMF recently found China's bank regulation to be in line with international standards.

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The government's close watch on when and exactly which foreign banks move into the U.S. may mean that Chinese movement into the U.S. banking market will be glacial, but from one perspective, it would be best if it moved more quickly.

"This is what globalization is, which is what we teach in business school," says Thomas. "We call this 'cross-border investment,' but it's got to work both ways. One country can't put up a wall while the other one says yes."

Danielle Kurtzleben is a business and economics reporter for U.S. News & World Report. Connect with her on Twitter at @titonka or via E-mail at dkurtzleben@usnews.com.