Chinese Banks Branch Out By RICK CAREW

The first approval in more than a decade for a Chinese bank to open a U.S. branch could open the way for others and raises hopes that Beijing, in turn, will open its financial markets wider to American firms.

China Merchants Bank Co., the country's sixth-largest bank by assets and widely viewed as one of its best-managed, won approval from the U.S. Federal Reserve last week to set up a branch in New York. An application by China's biggest bank, Industrial & Commercial Bank of China Ltd., is pending with regulators, and the Chinese lender hopes to get a green light soon.

For Chinese banks, a New York branch offers an outpost at the heart of the world's financial system. That allows them to better serve their traditional Chinese clients, who are building U.S. links and managing growing amounts of foreign exchange. Chinese companies also need global financing for the rising number of overseas acquisitions they are making.

"We've now met the world's most stringent regulatory standard," China Merchants Bank President Ma Weihua told reporters Friday. "We can now provide better financial support for Chinese companies as they go abroad."

The approval will give U.S. Treasury Secretary Henry Paulson more clout when he visits Beijing in December for the next round of the U.S.-China Strategic Economic Dialogue. Chinese regulators and bankers have repeatedly complained that they have allowed foreign banks like Citigroup Inc. to build dozens of outlets in China while the U.S. has withheld branch approvals for Chinese banks.

China Construction Bank Corp. Chairman Guo Shuqing, a former central banker and a top candidate to take up another regulatory post in the future, took U.S. authorities to task last month for not opening up more to Chinese banks.

"This is unequal, because we are fairly open to U.S. banks in China," he told reporters during a Communist Party meeting. "In the past, our banks had poor capital adequacy and bad operations, but now the situation has changed radically."

Starting in 2002, China's government embarked on a round of banking overhauls that included pouring tens of billions of dollars into state banks, peeling off mounds of nonperforming loans and listing bank shares in massive initial public offerings. Those overhauls, combined with a rebound in profits in the Chinese corporate sector, have put China's banks on a stronger financial footing.

China Construction Bank is 8.2%-owned by Bank of America Corp.

David Loevinger, U.S. Treasury attache in Beijing, said that ahead of December's dialogue, the U.S. will encourage China to further open up to foreign competition in the financial sector.

Among the main goals for the U.S. are getting China to grant broader access to foreign-invested companies in securities trading and to raise foreign-ownership caps on investments in Chinese banks. Mr. Paulson argues that more foreign participation will strengthen China's financial system and let Beijing adopt a more flexible currency regime faster without threatening stability. The U.S. has been urging China to let the yuan appreciate faster, as an undervalued yuan helps swell the big trade deficit the U.S. runs with the country.

China currently caps total foreign ownership in a domestic bank at 25% and limits a single foreign shareholder to 20%. Lou Wenlong, a midlevel official at China's banking regulator, speaking to reporters Friday after the Fed's decision, said he thought existing foreign-ownership caps are "suitable" for now. A task force of Chinese banking regulators is studying the impact of foreign participation on the banking sector and could recommend lifting the caps or keeping them at the current levels early next year when it delivers its report.

At present, only two Chinese banks operate U.S. branches: Bank of China Ltd. and Bank of Communications Co. Both of those banks were approved to set up New York branches before the U.S. tightened foreign-bank-supervision laws in 1991, in the wake of an international money-laundering and fraud scheme involving Pakistan-based Bank of Credit & Commerce International, or BCCI.

In weighing China Merchants Bank's branch application, the Federal Reserve put emphasis on judging its home regulator's supervision capabilities and China's efforts to prevent money laundering. After the May meeting of the bilateral economic dialogue in Washington, the U.S. agreed to support China's membership in the Financial Action Task Force on Money Laundering, and Beijing joined the body in late June. That imprimatur will likely encourage more Chinese banks to apply for branches in coming months.

The Fed said the China Merchants Bank branch will be allowed to engage in wholesale deposit-taking, lending, trade finance and other banking services.

Another midsize lender, China Minsheng Banking Corp., agreed in October to buy a 9.9% stake in San Francisco-based UCBH Holdings Inc. for as much as $317 million, marking the first strategic investment in a U.S. bank by a Chinese lender. UCBH specializes in providing retail banking and small business services to Chinese communities in the U.S.

Midsize Chinese banks such as China Merchants are expanding at home as well. The bank said Friday it plans to buy a 10% stake in Taizhou City Commercial Bank Corp.