U.S. Banks See Chance to Grow Alongside Chinese Middle Class

Growth-starved banks are on the prowl for business clients that want to export their American-made goods to fast-rising China.

From aerospace companies to pistachio growers, from film studios to medical device makers, a wide range of American companies are eyeing the burgeoning Chinese middle class. And banks, reading the same economic forecasts that U.S. manufacturers see, are lining up to woo those firms.

The megabank HSBC recently hosted a conference in Beverly Hills, Calif., where it touted its expertise in trade finance before a group of Southern California business owners. Again and again the conversation returned to China.

Steve Bottomley, HSBC's head of commercial banking in North America, said that U.S. businesses now sell 7% of their exports in China, up from 1% a decade ago. "We expect 14% of exports will go to China by 2030," he told the audience.

The opportunities are perhaps biggest in Los Angeles. China now accounts for around 40% of all international trade that passes through the region's ports and airports. In 2012, there was nearly three times as much trade with China through Los Angeles than there was through either Chicago or New York, which ranked second and third.

U.S. companies are continuing to export large quantities of raw materials — such as cotton, copper and recycled goods — that get used in products which are then shipped back to wealthier countries. But U.S. bankers say the mix of export goods to China is shifting toward consumer products, and they expect that trend to continue over the next couple of decades.

"It's about the middle class growing — and wanting, aspiring to a lifestyle that they have seen for many years in the United States," says Irene Dorner, president and chief executive officer of HSBC's U.S. operations. "And so consequently they feel an affinity, which makes it easier initially for American companies to go across and start business."

"That growing middle class looks so representative of where the U.S. was in the 1950s," says Peter Hughes, a banking consultant at CLB Advisory. "If you walk down the streets of Beijing, you will see women being very proud of carrying a Louis Vuitton bag."

Dominic Ng, CEO of East West Bancorp (EWBC) in Pasadena, Calif., says five years ago, his bank's export finance business to China was dominated by companies that sold recycling materials for use in factories. "We still have those clients, and they're still doing well. But they no longer are the dominant force," Ng says.

Today, Chinese consumers are buying more and more tickets for Hollywood blockbusters. They're drinking more California wine. And they're flying more frequently. "So the airlines in China are ordering a lot more jets, because there are a lot more flights scheduled," Ng says.

The opportunities are not confined to the West Coast. Huntington Bancshares (HBAN), which has mostly a Midwest footprint, is seeing export growth to China in the transportation sector, the farm equipment business and the chemical industry.

"You can really see exponential export growth to China out of our region," says Sheila Spradlin, Huntington's managing director of international banking. "So we're actively working very hard with our current client base and pulling in a few new ones along the way."

To distinguish themselves from competitors, banks in the U.S. are touting their fluency in Chinese regulation and their expertise on the vast country's geographic nuances.

"They have cities in China which are five, six million strong and growing, and each city has a different culture," says HSBC's Dorner. "And so the mistake, as it would be actually in the United States to be perfectly frank, would be to go in and think that one size fits all."

Banks are also talking to U.S. businesses about their ability to navigate Chinese regulations, which are liberalizing, but still are often designed to protect Chinese manufacturers. And they are touting their capabilities in settling transactions in the Chinese renminbi, which is an increasingly important asset for U.S. banks.

"I would say that even three or four years ago, almost all of the Chinese companies settled their trade accounts exclusively with U.S. dollars," East West Bank's Ng says. "But today, a substantial number of Chinese companies, and even some U.S. companies, are settling their trade and investment accounts in Chinese currency. And this phenomenon will continue, I think, in the next several years."

Of course there are risks for banks operating in the U.S. For example, it's important for banks to have strong anti-money-laundering compliance programs, observers say.

"They are doing a very good job to root out corruption, but corruption is still a significant issue," Hughes says, referring to the Chinese market. "I do think the American banks, because of the Patriot Act, have their antennae up."

There's also the risk that banks will overextend themselves in a country where certain competitors have more experience and expertise. "China is changing rapidly," Ng says. He warns that it will be difficult for U.S. banks that don't know the Chinese market well enough to build a profitable long-term export finance business.

Finally there's the risk that China's imports will cool off substantially. The growth of China's consumption economy is the result of government policies, and observers believe that long-term trend is unlikely to be reversed. But to a large extent, the bets that U.S. manufacturers and their banks are placing hinge on the continuation of rapid growth in China's gross domestic product.

At HSBC's recent trade forum, bank executives said there will be ups and downs in China's economic course, but the long-term picture looks better than anywhere else on the globe.

"I think that I would be placing my bets on China, absolutely," said Arjan van den Berkmotel, managing director of West Coast corporate banking for HSBC. Referring to the recent slowdown in China's economic growth, he added: "Call it a temporary blip. Call it a slight correction."