Fed Has Opened the Door for China to Push Its Agenda

Imagine if China's leaders allowed U.S. banks to operate in China. And imagine if the U.S. banks, in contrast to pursuing their normal goal of maximizing shareholder value, sought to help the U.S. government gain geopolitical advantage and help U.S. firms compete with Chinese competitors. What actions would the U.S. banks take?

As agents of U.S. interests, they would probably share information from Chinese clients with U.S. policymakers and U.S. firms. They would lend money to U.S. companies at lower interest rates than the ones being offered to Chinese firms. They might even foreclose faster on Chinese companies that competed with favored U.S. firms.

Sounds preposterous, of course. U.S. banks are in the business of making money, not working on the sly for Uncle Sam.

But now reverse the situation. What if the U.S. allowed Chinese banks to operate freely in the U.S.? What if those banks pursued their normal goal of helping China gain geopolitical advantage and Chinese firms compete globally. What actions would the Chinese banks take?

Likewise, they would probably share information from U.S. clients with Chinese policymakers and competitors. They would lend money to Chinese companies at lower rates than the ones being offered to U.S. firms. The banks would act as agents of the Chinese government. And they would have China's massive dollar reserves at their disposal, giving them the power to underprice U.S. banks, manipulate interest rates and handicap loan-seeking U.S. firms.

Unfortunately, this second scenario is not so preposterous.

In May, the U.S. Federal Reserve cleared Industrial and Commercial Bank of China, which has $2.5 trillion in assets and is 71%-owned by China, to buy 80% of the U.S. unit of the Bank of East Asia. It also cleared the 71% government-owned Bank of China and the 83% government-owned Agricultural Bank of China to open new branches in the U.S. In the process, it approved the China Banking Regulatory Commission's "comprehensive consolidated supervision" of the banks. The approval allowed a Chinese bank to buy a controlling stake in a U.S. bank for the first time.

Federal Reserve chairman Ben Bernanke and other Fed governors, in giving unanimous approval, have put the U.S. at risk. In a Rand Corporation study last year, analysts examined China's investments in the U.S. 78% of  the money China invested in the U.S. from 2007 to 2009 was in banking and financial services. Less than one quarter of its money was invested in other industries, mainly spread across refineries, semiconductors, telecommunications, laboratory testing equipment, and auto parts. What was China's purpose in spending on banks so heavily?

To quote Rand's analysts, "professional U.S. national security analysts" would argue that this "suggests a Chinese interest in acquiring information, contacts and connections that extend into the wide reaches of the U.S. economy and may reveal useful insights into its strengths and perhaps vulnerabilities."

Other national security analysts might ask: Will the Chinese state-owned banks aid in cyber-warfare during tough times? Will they finance the Chinese government's acquisition of U.S. firms with sensitive technologies or critical nodes in our information superhighway that might make America vulnerable to monitoring or shutdowns of critical banking, electrical or other systems? Will they help China acquire critical American raw materials for China's use only?