By Denny Gulino

WASHINGTON (MNI) – China’s foreign exchange reserves are going
to include a New York bank in an unprecedented purchase approved
Wednesday by the Federal Reserve.

New York’s Bank of East Asia will be owned by China’s sovereign
wealth fund CIC, which is responsible for managing part of the People’s
Republic foreign exchange reserves, as well as by the state-owned
Industrial and Commercial Bank of China.

The 80% ownership is also being spread to Central Huijin
Investment, controlled by CIC, all of which are approved to become bank
holding companies.

At the same time, the Fed is allowing the Agricultural Bank of
China to establish a branch in New York and the Bank of China to have a
branch in Chicago.

The Fed said the Department of Justice “reviewed the matter: and
advised the acquisition of the New York operation will not adversely
affect competition. The FDIC likewise expressed no objection.”

Among the 64 footnotes to the announcement, the Fed noted that
China bank regulators have subscribed to international agreements “that
address money laundering or terrorist financing” and that there was no
reason to believe proper supervision would be lacking.

ICBC already operates a state-licensed branch in New York City and
owns New York based Industrial and Commercial Bank of China Financial
Services.

In resolving all of the objections to the purchase, the Fed
dismissed a claim that the government of China must itself become a U.S.
bank holding company because it controls the sovereign wealth fund.

“The Board has a long-standing position that, as a legal matter,
foreign governments are not ‘companies’ for purposes of the Bank Holding
Act and, therefore, are not covered,” the Fed answered.

The application was submitted well before the just-completed
U.S.-China Strategic Economic and Economic Dialogue, at which the U.S.
pressed China to open further its domestic market to American financial
firms. But past annual dialogues have pushed the same objective.

In summarizing the accomplishments of last week’s SE&D, Treasury
Under Secretary Lael Brainard Tuesday said China announced it intends
“to move beyond its commitments in the WTO by permitting foreign
investors to take up to 49% equity stakes in domestic securities joint
ventures, and shorten the waiting period for securities joint ventures
to expand into brokerage, fund management, and trading activities.”

China will also allow U.S. and other foreign investors to establish
joint venture brokerages to trade commodity and financial futures and
hold up to 49% of the equity in those joint ventures.

While Chinese companies have been allowed minority stakes in U.S.
banks, the Fed and other regulators have up to now not allowed Chinese
majority ownership and have been slow to approve branches of China
banks.

Wednesday’s decision required a change of view about China’s
reputation for lax banking oversight, and came to the conclusion it does
have competent regulatory authorities.

The Fed noted that it is required to consider regulatory adequacy
and whether accounting standards are up to the U.S. level. “There is no
evidence that Chinese accounting methods or practices at the large
Chinese banks, such as ICBC, are unreliable,” the Fed noted.

The Fed did acknowledge that China as a country received a
“materially noncompliant” rating in two of 30 areas of financial
stability ranked by the IMF but noted that was one fewer than either the
UK or Germany, and that the United States had also received the same two
“noncompliant” findings. The Fed also noted the China Banking Regulatory
Commission had the authority to override international standards but has
never done so.

The Fed took into account, it said, that “China is, overall, in
satisfactory compliance with the Basel Core Principles and that there
are areas for further improvement.”

The Fed also said no public hearing on the acquisition was
necessary since none of the Bank’s other regulators requested one.

There were objections, as well, that the acquisition would “raise
national security concerns,” the Fed said. “Congress has given other
U.S. agencies the authority to review national security issues in
proposals by foreign companies to acquire U.S. companies,” the Fed
answered.

The acquisition can be accomplished after 15 days have elapsed.

** MNI Washington Bureau: 202-371-2121 **

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