China banker says U.S. economy cause for concern

Chinese banks fear the prospect of a U.S. economic recession, which may result in slower growth of China's trade surplus and thus hurt sector earnings growth in the world's fastest-growing major economy, the CEO of the nation's biggest non-state lender told Reuters.

Ma Weihua of Merchants Bank Co <600036.ss><3698.hk> said that while the snowballing credit crisis could bring opportunities for Chinese banks to expand in the U.S. market through acquisitions or alliances, now is not a good time to take any action.

"Nobody knows when the crisis will end and where the bottom will be," Ma said. "Whenever you consider a merger or acquisition opportunity, in particular something abroad, you need to be very clear of the risks that you may take."

Despite his caution, Merchants -- China's sixth-largest bank by assets -- will expand in the United States this year by setting up a New York branch and hiring local staff, Ma said late on Thursday after his speech at Columbia University in New York.

Ma's comments came after some of China's major financial institutions had already suffered losses on overseas deals they made last year.

For instance, China Minsheng Banking Corp <600016.ss>, a smaller rival of Merchants Bank, has lost half of the value of its purchase of a 9.9 percent stake in San Francisco-based UCBH Holdings . The transaction had marked the first time a Chinese commercial bank invested in a U.S. bank.

U.S. IMPACT

The subprime mortgage-related financial crisis has already led to a global debate on whether the U.S. economy has entered its recession. Many Chinese banks are concerned because any downturn in U.S. consumption could affect international trade-related banking business, especially Sino-U.S. trade.

Banking regulators in Beijing have repeatedly warned Chinese banks of the potential risks of a U.S. economic downturn, urging them to "keep a clear mind" when expanding in that market right now, said Ma, a former senior Chinese central banker and foreign exchange regulator.

"Obviously, the credit crisis is having major impacts on not only American banks but Chinese banks as well," he said. "If our clients suffer, in particular these export company clients, then the bank's business will be also hurt."

China's trade surplus jumped about 48 percent to a record of more than $262 billion for 2007, but senior Chinese officials foresee slower growth in 2008 due to weaker U.S. demand in the wake of the subprime mortgage crisis,

Meanwhile, Ma said the credit market woes had already affected China's financial system, making it harder for Beijing to plan its monetary and foreign exchange policies.

"Because the U.S. dollar is depreciating almost every day, fewer and fewer people want to bring the money out of China nowadays," Ma said. "However, keeping all this capital in China will definitely increase the pressure on Beijing for how to manage its already huge foreign exchange reserves."

If the U.S. Federal Reserve continues to cut its interest rates, he added, China's central bank will have less room to raise its rates. But he acknowledged Beijing might have to do that this year to battle inflation problems amid increasing domestic complaints.

Ma said 2008 would be a tough year for all Chinese banks, although Merchants Bank planned to boost its fee income-based services, such as credit cards and wealth management products, in an effort to maintain its profit growth.