JANUARY 21, 2011, 1:19 P.M. ET.

China's ICBC Bids for U.S. Entry

By LINGLING WEI

CHICAGO—Industrial & Commercial Bank of China Ltd. on Friday signed an agreement here to acquire a majority stake in Bank of East Asia Ltd.'s U.S. subsidiary, becoming the first state-owned Chinese bank to make an acquisition of a U.S. deposit-taking institution.

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Industrial & Commercial Bank of China on Friday signed an agreement to acquire a majority stake in Bank of East Asia.
.The deal, signed on the last day of Chinese President Hu Jintao's state visit to the U.S., represents what could be the start of big expansions by Chinese financial institutions in the world's largest economy.

The deal comes as both Beijing and Washington are calling for greater commercial ties between the two countries. China is prodding the U.S. to ease its export controls, especially those involving high-technology products, while the U.S. is asking for more Chinese purchases of made-in-America goods and services.

Still, the Bank of East Asia transaction promises to be carefully scrutinized by U.S. regulators, including the Committee on Foreign Investment in the United States, known as Cfius, because of the state-controlled nature of ICBC, China's largest lender. Bank of East Asia is a publicly traded bank based in Hong Kong.

"It is going to be a long process," a person familiar with the matter said.

The Beijing-based bank, also the world's largest by some measures, is 70%-owned by the Chinese government. It has grown increasingly comfortable venturing outside its home markets, which still account for the bulk of its profits. Last year, ICBC got into the broker-dealer business in the U.S. with a symbolic $1 purchase of the U.S. brokerage unit of Fortis Securities, controlled by France's BNP Paribas SA. That deal didn't subject ICBC to tight U.S. regulatory restrictions on foreign purchases of retail-banking operations.

U.S. regulators often demand foreign banks prove they are adequately supervised in their home markets and have proper anti-money-laundering procedures in place before allowing them to set up retail operations, legal experts say.

Under the deal, ICBC agreed to pay about $100 million for a controlling stake in Bank of East Asia's U.S. unit, according to people familiar with the matter. The agreement was signed at the Hilton Chicago as part of a slew of pacts announced by some 60 U.S. and Chinese companies at a giant "signing ceremony" organized on Friday by China's Commerce Ministry and its U.S. counterpart.

Both Beijing and Washington are eager to showcase their willingness to strengthen the business ties between their two countries, despite the many issues that will continue to hinder the relations. The contract-signing event in Chicago was hailed as "the most important event" in conjunction with President Hu's visit, according to officials in the Chinese delegation.

The move by ICBC underscores the desire by Chinese banking executives to transform their strength into a greater presence globally, as Chinese banks have emerged from the global financial crisis largely unscathed. Their hope is to better support Chinese companies and guard against losing key customers to U.S. and European banks that already have networks world-wide.

Meantime, Beijing also has encouraged Chinese companies to expand overseas in recent years. In light of the huge foreign-exchange reserves China has, Beijing has been encouraging its banks to invest more overseas.

While China's resource and construction firms have moved aggressively into new markets, its financial institutions generally have been slow to follow.

So far, most Chinese investments in the U.S. financial sector have involved the Chinese taking passive, minority stakes in firms like Blackstone Group LP and Morgan Stanley. And the deal to acquire the U.S. subsidiary of Bank of East Asia, a Hong Kong-based bank led by prominent Asian banker David Li, represents a rather bold move for ICBC.

Mr. Li drew unwanted attention to himself in the U.S. and Hong Kong in 2007 when the former board member of Dow Jones became target of an insider trading case involving News Corp.'s buyout bid for Dow Jones. Mr. Li later agreed to pay $8.1 million to settle the civil charges.

At the same time, Bank of East Asia is no stranger to ICBC. It sold a 70% stake in its Canadian operations to ICBC last year and all of its six branches in Canada have since been rebranded ICBC Canada.

Bank of East Asia has 13 branches in the U.S., concentrating in New York and California—two regions that boast the largest numbers of Chinese immigrants. The bank formed its U.S. banking subsidiary in 2001 through the acquisition of Grand National Bank of Alhambra, Calif.

The deal, if approved by U.S. regulators, would allow ICBC to gain relatively quick access to American depositors. Right now, the bank has one branch in New York, but it isn't involved in the retail-banking business. Bank of China Ltd. is the only mainland Chinese bank that has a retail license in the U.S. market. Bank of China, also state-owned, has two branches in New York and one in Los Angeles. It recently has started allowing American customers to buy and sell the Chinese currency through its U.S. branches.

The move by Bank of China is the latest move by China to allow the yuan, whose value is still tightly controlled by the government, to become an international currency that can be used for trade and investment.

If ICBC's deal to acquire Bank of East Asia's U.S. subsidiary goes through, the retail presence also would enable ICBC to let American customers open yuan accounts and trade the currency with the bank.

Chinese banks have encountered uphill battles to gain access to the U.S. market in the past. For instance, it took almost two years for ICBC to get the approval from the Federal Reserve to open its New York branch, which has so far focused on commercial lending. That greenlight was given shortly before President George W. Bush's trip to Beijing for the Summer Olympics in 2008.

Some Chinese banks have suffered outright refusal to acquire their U.S. counterparts. A case in point is China Minsheng Banking Corp. In 2008, Minsheng, China's first private bank and a midsize lender, agreed to take a 9.9% stake in San Francisco-based lender UBC Holdings Inc., the holding company for United Commercial Bank. Minsheng had to write off its $130 million investment after U.S. regulators in late 2009 shut down United Commercial Bank over bad loans and financial-reporting misstatements.

But at the time, Minsheng had sought to acquire United Commercial Bank, but U.S. regulators had rejected the move because of restrictions on foreign investment in U.S. banks, according to people familiar with the matter.

Meanwhile, just as Chinese banks are expanding overseas, China's market is only slowly opening to foreign competition. Profits in China for banks based in other countries are still negligible, underscoring the obstacles confronting non-Chinese banks in the world's second-largest economy.

Write to Lingling Wei at lingling.wei@wsj.com

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