WikiLeaks: China wanted to invest in U.S. banks during '08 crisis

McClatchy NewspapersSeptember 4, 2011 

CHARLOTTE, N.C. — During the throes of the 2008 financial crisis, a top Chinese banker told U.S. officials that his company and others in China were interested in taking significant stakes in U.S. banks but expected a backlash from regulators and the American public, according to U.S. diplomatic memos.

The chairman of China Construction Bank, one of the world's largest banks, made the comment during two separate meetings in November 2008, according to State Department cables obtained by McClatchy through WikiLeaks.

At the time, U.S. banks were desperate for capital to absorb losses from mortgage-related investments and rising loan losses. But no Chinese investments were made, apparently because it would have opened the Chinese banks to regulatory scrutiny in the United States.

Still, the memos provide a window into the thinking of Chinese banking officials as their counterparts in the U.S. suffered through an epic financial meltdown. One of the Chinese investment funds eventually won Federal Reserve approval for an investment in New York-based Morgan Stanley, although not until last year.

China Construction Bank gained attention last week when Charlotte-based Bank of America Corp. sold shares it had owned in the Chinese bank in a move to boost the U.S. bank's capital levels. Bank of America will continue to hold a 5 percent stake in China Construction Bank after the sale.

In recent years, U.S. banks and companies have been eager to invest in Chinese companies and banks during a boom in that country's economy. But Chinese investments in U.S. companies have been a flash point for criticism. In 2005, a public and congressional backlash helped scuttle China's government-controlled CNOOC Ltd.'s $18.4 billion bid to buy oil company Unocal Corp.

In 2008, Chinese banks were in position to provide capital to struggling U.S. banks and were interested in working more closely with their American counterparts, said David Bachman, a professor in the Jackson School of International Studies at the University of Washington. But taking a significant stake would have triggered regulatory scrutiny and questions about whether Chinese banks were taking advantage of "fire sale" prices, he said.

"Eventually, they came to the conclusion that it was too much effort or too much bother," Bachman said.

Investments by Chinese banks in their U.S. counterparts have raised concerns among policymakers because many of these financial institutions are controlled by the Chinese government, said Virginia-based banking consultant Bert Ely. The concerns were similar to when the U.S. Treasury invested in banks as part of the Troubled Asset Relief Program, he said.

"There was fear when the government owns a piece of a bank to what extent does it get misused to advance policy initiatives, rather than being a strictly commercial operation," Ely said.

The State Department does not comment on the authenticity of documents released by WikiLeaks. Last week, spokeswoman Victoria Nuland said the U.S. "strongly condemns any illegal disclosure of classified information."

Most of the cables examined for this story were unclassified, though some were classified "confidential" or "secret." On Thursday, WikiLeaks published its full cache of cables on its website.

Beijing-based China Construction Bank is the second biggest bank in China and the world, with a market capitalization of $187 billion.

When it went public in 2005, Charlotte-based Bank of America took a 9 percent stake in the company and later bought more shares. China Construction Bank's largest shareholder is a subsidiary of China Investment Corp., a state-owned investment company that holds a 57 percent stake.

In November 2008, a month and a half after the banking crisis led to the bankruptcy of Lehman Brothers and the sale of ailing institutions such as Merrill Lynch and Wachovia, China Construction Bank Chairman Guo Shuqing met with U.S. Ambassador Alan Holmer, who served as a special envoy to China for the U.S. Treasury Department from 2007 to 2009.

Guo told Holmer that China, the Middle East and other state-owned investors could provide capital to the U.S. banking industry, according to a cable. China Investment Corp. and the China State Administration of Foreign Exchange, another state-controlled investment firm, would be willing to take 10 to 15 percent stakes, he said.

"For this to occur, however, the U.S. sentimentality and political climate vis-a-vis these kinds of investors needs to change," Guo told Holmer, according to the cable.

Guo said that though Chinese banks weren't seeking operational control he doubted that the U.S. Congress or public would accept a 10 percent stake by a Chinese bank in an American bank. China Construction Bank had been working to obtain a license for a U.S. branch since the mid-1990s, he noted.

In a meeting later that month with visiting Federal Reserve Gov. Randall Kroszner, Guo said his bank was considering overseas investments. The cable didn't disclose possible investment targets.

Soon after the meeting, in December 2008, the Fed approved China Construction Bank's application for a branch in New York. If a foreign bank has a U.S. branch, it's subject to rules that require Federal Reserve approval if it seeks to take a stake of 5 percent or more in a U.S. bank.

At the same meeting with Kroszner, China Investment Corp. Chairman Lou Jiwei said the investment fund had held "intense" talks with Morgan Stanley about an investment that fall. China Investment Corp. decided not to proceed for a number of reasons, the most significant being "its failure to receive from the U.S. Federal Reserve a written exemption from U.S. regulations and investment barriers," the cable said.

Instead, Morgan Stanley landed a $9 billion investment from a Japanese bank, Mitsubishi UFJ Financial Group, in September 2008. Lou "lamented that CIC's inability to increase its stake in Morgan Stanley had become viewed as a symbol of the United States' lack of openness to Chinese investment."

Less than two years later, in August 2010, however, China Investment Corp. won Fed approval to acquire up to 10 percent of Morgan Stanley's voting shares. China Investment Corp.'s Fed application said it did "not propose to control or exercise a controlling influence over Morgan Stanley and that its indirect investment will be a passive investment." In its latest proxy filing, Morgan Stanley said China Investment Corp. held a 9.76 percent stake in the firm.

Although it hasn't invested in Bank of America, the sale of BofA's shares in China Construction Bank did provide a boost last week to the Charlotte bank, which is struggling with mortgage troubles inherited from its 2008 Countrywide Financial acquisition. Bank of America's shares rose 8 percent after it announced that it was selling half the shares it owns in China Construction Bank for a $3.3 billion gain.

(Rothacker reports for The Charlotte Observer.)

READ THE CABLES

Cable: Foreign banks in China face problems

Cable: Treasury meets with China about foreign markets and firms

Cable: Discussion of Chinese economic reforms and the U.S. mortgage crisis

Cable: American Ambassador Holmer discusses finance with Chairman He

Cable: Worries about China's economy

McClatchy Newspapers 2011

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