Where's the Capital of China?

Chinese banks have become a source of funding for small-business owners around the world. An overview of China's stake in the world economy and what to expect when bringing in Chinese investors.

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They're big, they're rich, and they want to give you money. Are Chinese banks the lenders you've always dreamed of?

For generations the Jonathan Club, in downtown Los Angeles, has been a symbol of old-line WASP power, counting among its members such prominent figures as railroad magnate Henry Huntington, one of the founding capitalist powers of the Pacific metropolis, and William Mulholland, the engineer who brought down the Sierra water critical to the region's growth.

For most of the club's century-long existence, someone like Christopher Leu would have been lucky to get a job scrubbing dishes there. Until fairly recently, Asians, Hispanics, Jews, African Americans, and women were largely excluded from the club's elite membership, which remained overwhelmingly white, Christian, and male. Yet today Leu is greeted in the club's wood-paneled dining room like the ultimate insider.

"The Chinese economy is becoming integrated into the whole economy," explains the Hong Kong-born Leu, president of Los Angeles-based United Pacific Bank. "It's dim sum on weekends but pasta and hamburgers during the week."

The integration of Chinese such as Leu into the wider economy may be a watershed event for small, capital-hungry companies. The Chinese banking community--part of a global diaspora with vast financial reserves--has opened its vaults to non-Chinese entrepreneurs and promises to become a valuable new source of funding. What's more, early evidence suggests that the quality, not just the quantity, of Chinese lending is uniquely suited to serve small-business borrowers.

All of which explains in part why Leu is eating at the Jonathan Club and not at one of the hundreds of Chinese restaurants downtown and in the neighboring San Gabriel Valley. Like his WASP forebears at the Jonathan, Leu is looking for contacts and prospects--lawyers, accountants, financiers, and company owners. Once largely oriented toward Chinese borrowers, Leu has shifted his emphasis to serving small-business customers throughout Southern California.

The current move of Chinese-owned banks into mainstream U.S. markets reflects several critical trends in the global economy. One is financial: Chinese entrepreneurs in Taiwan, Hong Kong, China, and throughout Southeast Asia have accumulated huge stores of capital--much of it in U.S. dollars. Today Hong Kong, Singapore, and Taipei, the principal homes of Chinese who live overseas, have more foreign-currency reserves than any nation in the world, including Japan. For most of the past two decades, the bulk of that capital has been reinvested in east Asia, where returns on investment have historically been higher than in the United States. But that's changing, say Chinese financiers, because of trends that are political--and, they believe, lasting. The past few years have brought growing governmental instability in the region--the aftershocks of China's takeover of Hong Kong and its occasionally threatening posture toward Taiwan--which has badly damaged return rates, the potential for long-term economic growth, and currency security. "America is the safe haven," says Henry Hwang, whose Los Angeles-based Far East National Bank was recently purchased by Taipei's Bank Sinopac. "America is seen as still number one, the most prosperous and stable place. The opportunities are still here."

California is the epicenter of this activity: in Los Angeles alone, for instance, prior to 1989 there was just one Taiwan-based bank, compared with 10 today. But Chinese lenders are fast becoming bigger players in the entrepreneurial economies of growing cities such as Seattle and Houston as well. Seattle's Washington First International Bank, under president Elizabeth Huang, has grown since its 1990 founding to nearly $200 million in assets, and it now conducts nearly half its business with non-Chinese. "I think there's a huge niche to be filled," says Huang. "A lot of smaller companies need international banking, and the bigger banks are not good at servicing them." Huang and her peers have discovered what they consider a gold mine in the vastly underserved market of small and midsize companies outside their own ethnic community.

Is banking with the Chinese different? James B. Davis thinks so. Davis, founder of Practice Management Information Corp., a publisher of medical books in Los Angeles, had grown his business while banking with City National Bank, now L.A.'s largest commercial bank. His company made the Inc. 500 in 1993 and 1994. But Davis had become increasingly frustrated by the diffident and distant posture of his bank.

His attempts to obtain a line of credit were rebuffed--unless he was willing to pledge his personal assets.

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