Thursday, October 8, 2009

Reciprocity or Market Principles?

A story appeared in Bloomberg today that China Minsheng Bank, the largest "private" bank in China, intends to raise its stake in a US-based bank to as much as 50 percent. The company, UCBH Holdings runs the United Commercial Bank of San Francisco which has about $13 billion in assets.

Minsheng made its initial purchase of 4.9 percent of UCBH in 2007 and then increased its holding to 9.9 percent in 2008.

Assuming Minsheng meets the Fed's requirements in terms of its management capability and the health of its balance sheet, the purchase will probably be approved. It seems only fair that a Chinese bank should be allowed to purchase a share of an American bank. After all, American banks own shares of Chinese banks, right?

Well, yes, but there's a catch. Foreign banks are not allowed to own more than 20 percent of a Chinese bank. These terms were agreed upon when China joined the World Trade Organization in 2001, but I wonder whether US negotiators gave even a moment's thought to whether China would someday want to buy shares in foreign banks as well.

Here's the question: When reviewing the proposed purchase of UCBH, should the US demand reciprocity -- that if Chinese banks can buy a controlling interest in a US bank, US banks should have the same privilege in China -- or should the US just stick to "market principles" and allow Minsheng to go through with its purchase?