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Cablegate: Citibank's Stanley On Gdb and China Business

VZCZCXRO3323
RR RUEHCN RUEHGH
DE RUEHGH #0161/01 0820821
ZNR UUUUU ZZH
R 230821Z MAR 07
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 5622
INFO RUEHBJ/AMEMBASSY BEIJING 0897
RUEHCN/AMCONSUL CHENGDU 0502
RUEHGZ/AMCONSUL GUANGZHOU 0485
RUEHHK/AMCONSUL HONG KONG 0607
RUEHSH/AMCONSUL SHENYANG 0509
RUEHIN/AIT TAIPEI 0410
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 5994

UNCLAS SECTION 01 OF 03 SHANGHAI 000161

SIPDIS

SENSITIVE
SIPDIS

STATE PASS FEDERAL RESERVE BOARD FOR JOHNSON/SCHINDLER; SAN
FRANCISCO FRB FOR CURRAN/GLICK/LUNG; NEW YORK FRB FOR
CLARK/CRYSTAL/MOSELEY
STATE PASS CFTC FOR OIA/GORLICK
CEA FOR BLOCK
USDOC FOR ITA DAS LEVINE AND OCEA/MCQUEEN
TREASURY FOR OASIA - DOHNER/CUSHMAN
TREASURY FOR IMFP - SOBEL/MOGHTADER
NSC FOR KURT TONG

E.O. 12958: N/A
TAGS: EFIN EINV ECON PREL CH
SUBJECT: CITIBANK'S STANLEY ON GDB AND CHINA BUSINESS

REF: A. Shanghai 159

B. 06 Shanghai 7112 and prior

1. (SBU) Summary: During a March 8 meeting with Beijing
Financial Attache David Loevinger, Treasury Asia DAS Robert
Dohner, Asia Director Mathew Haarsager and Congenoffs, Citigroup
China CEO Richard Stanley expressed great appreciation for USG
support which facilitated its December acquisition of a 19.9
percent interest with management control of Guangdong
Development Bank (GDB). Stanley discussed challenges in
managing GDB and hopes for lifting of the foreign ownership
caps. He urged the Federal Reserve Bank (FRB) to find a way to
approve a U.S. branch for one of the "better run" Chinese banks,
and said the impact on Chinese willingness to further liberalize
its financial markets would be significant. Stanley noted the
processing of incorporating was going faster than expected. The
Chinese Banking Regulatory Commission clearly wanted Citi to be
among the first banks to incorporate, due in part to USG
interest. The problem was it hadn't yet issued rules for
foreign banks to offer credit and debit cards, without which it
would be difficult for them to attract RMB deposits. Stanley
noted the continued inability to hold open foreign exchange
positions longing the RMB and expressed concerns about new
foreign debt limitation regulations, opined on necessary changes
to QFII and QDII policies, and discussed Citi's extensive
efforts to train its China employees, including the 13,000 GDB
employees, and to develop rising stars through its worldwide
"farm system." End Summary.

--------------------------------------------- -----------
USG Support Critical for Guangdong Development Bank Deal
--------------------------------------------- -----------

2. (SBU) Stanley expressed great appreciation for USG support of
its efforts to acquire an ownership stake with management
control of GDB. Stanley thought the efforts of Secretary Paulson
during the December Strategic Economic Dialogue, as well as
extensive support from Treasury and Congen staff were critical
to securing final approval. He had highlighted this model of
successful business-government collaboration in a global
conference of Citi managers.

3. (SBU) Stanley said Citi's ability to reform the bank would be
much greater with 51 percent or more ownership. Citi looked
forward to lifting of ownership caps and had a seven-year option
to acquire up to an 85 percent interest if caps were lifted.
HSBC's option to acquire up to a 40 percent stake in BOCOM would
expire in a year. Right now, Citi had blocking rights at the
board-level with GDB, but didn't have the ability to force
decisions. Stanley said it was perhaps just as well it didn't
have a majority stake yet. If it did, it would have to
consolidate its financial statements. As it was, Citi could
account for the deal as an equity investment.

4. (SBU) Nonetheless, the acquisition presented challenges with
U.S. regulators. The FRB considered the acquisition a
subsidiary subject to U.S. anti-money laundering (AML) rules.
Citi would be under pressure from the FRB and the Office of the
Comptroller of the Currency to effect change but neither
regulator would have the power to audit GDB. Citi understood
the dilemma and the fact that ultimately the regulators could
use penalties, fines, sanctions or a forced divestiture if
warranted. Stanley believed CBRC would be supportive of its
efforts to establish effective AML rules at GDB since China
intended to join the Financial Action Task Force (the
international organization which develops and promotes polices
to combat money laundering and terrorist financing).

--------------------------------------------- --------
Citi's Investment in Shanghai Pudong Development Bank
--------------------------------------------- --------

5. (SBU) After the Secretary's financial services roundtable
(Ref A), Shanghai Pudong Development Bank (SPDB) Chairman Jin

SHANGHAI 00000161 002 OF 003


Yun buttonholed Pol/Econ Chief to explain how Citi had missed
the boat by not purchasing a larger stake as he had advised
Stanley when SPDB shares were USD 3. Now, at USD 20/share, it
would be much more expensive for Citi to increase its stake.
Stanley said Jin was absolutely right; unfortunately SPDB wasn't
a priority for former CEO Sandy Weill at the time. Stanley
explained that, after conversion of non-tradable shares, Citi
now held only a 3.7 percent stake in SPDB, although it had an
option to increase to a 19.9 percent stake. He said the
investment was really a 50/50 synthetic credit card JV, although
it was losing money. At current prices, increasing Citi's SPDB
stake to 20 percent didn't make sense. Citi would like to spin
off the credit card business and then, if possible, increase its
ownership stake; otherwise it might prefer to spin off and sell
the card business. On a related note, Stanley mentioned that
SPDB had worked with Carrefour to develop a co-branded card, and
planned to have SPDB ATMs in every Carrefour store in China.
SPPB got approval from Visa to do such a co-branded debit card
but China Union Pay turned it down.

--------------------------------------------- -----------------
FRB Approval of Chinese Branch Could Have a Significant Impact
--------------------------------------------- -----------------

6. (SBU) Stanley repeated his oft-urged suggestion that the FRB
try to find a way to approve a branch license for one of the
better-run Chinese banks, such as China Merchants Bank. He had
heard that the FRB might be considering approving a branch from
another developing country. While that might be progress in
terms of breaking the logjam, it would likely be interpreted in
a negative light by China. Approval by the FRB of a Chinese
bank's branch application would be extremely helpful to USG
efforts to persuade China to further liberalize its financial
and capital markets. Stanley said he didn't know how much
linkage there was, but Citi had only just received approval for
its seventh China branch in Hangzhou; HSBC already had 14.

--------------------------------------------- ----------
CBRC Extremely Helpful with Local Incorporation Process
--------------------------------------------- ----------

7. (SBU) Stanley said CBRC had gone out of its way to be helpful
to Citi in dealing with the local incorporation process. China
wanted the major foreign banks to apply for approval at the
first opportunity on December 11, 2006 and the process now
seemed to be moving forward at "a lightning pace." Stanley
expected approval as early as April. The week before, a CBRC
team had met with Citi to discuss a range of technical issues,
including how to treat interbank lending, off-shore transactions
and debit cards. (Note: On March 20, Dow Jones reported that
CBRC had approved the locally incorporated entities of four
foreign banks, Citigroup, HSBC, Standard Chartered, and Bank of
East Asia, to begin offering unrestricted local-currency
services to Chinese individuals. End note.) Stanley said the
local incorporation regulations had worked out OK for Citi, but
he understood the end result was not necessarily a great outcome
for foreign banks as a whole. Banks like Wachovia and JP Morgan
would have difficulty meeting the requirements; Bank of America
had agreed to close its own retail presence when it took a
minority stake in China Construction Bank.

--------------------------------------------- -----------
But Hard to Attract Customers without Offering ATM Cards
--------------------------------------------- -----------

8. (SBU) Stanley said his main concern at this point was that,
due to the delay of issuance of CBRC regulations dealing with
how foreign bank subsidiaries could offer credit and debit
cards, Citi would be at a competitive disadvantage in attracting
RMB deposits compared with Chinese banks.
--------------------------------------------- ----------------
QFII, QDII, and Foreign Currency and Foreign Debt Limitations
--------------------------------------------- ----------------

SHANGHAI 00000161 003 OF 003

9. (SBU) Stanley said the Qualified Foreign Institutional
Investor (QFII) program had been a huge success; there just
wasn't enough quota. The Qualified Domestic Institutional
Investor (QDII) program needed to have more investment options
(particularly equity) to make it attractive enough to offset the
potential capital loss on RMB appreciation. Citi looked forward
to doing more RMB business since it was more profitable; its RMB
balance sheet was already greater than its USD balance sheet.
However, in addition to the ATM issue, Citi was concerned that
it would be a challenge to meet required deposit/loan ratios,
even though the CBRC gave foreign subsidiaries a transition
period to meet them. On foreign exchange trading, banks in
China were still prevented from holding open positions longing
the RMB. (Note: According to recent press reports, Standard
Chartered's Bohai Bank, recently received approval to take
long-RMB positions overnight. End note.) Stanley was also
concerned about new foreign debt restrictions announced on March
2 in an attempt by the Central Government to limit capital
inflows. Under the new rules, Citi's foreign debt limit would
be reduced in stages over the next two years to 30 percent of
its current USD 2.2 billion level. Since Citi now was using
only about USD 1.6, the first couple quarterly reductions
wouldn't have an immediate impact; they would however, reduce
Citi's maneuvering room in managing its liquidity.
Furthermore, the limits would increase Citi's cost of funds
since it was much cheaper for Citi to borrow in Singapore than
on the domestic interbank market.

---------------------
Training and Turnover
---------------------

10. (SBU) Citi had an overall 15 percent turnover rate in China,
with about 40 percent turnover in consumer banking, mostly sales
people. While Chinese banks have expressed concern that greater
FDI would increasing poaching of skilled staff, there was little
flow of employees between Chinese and foreign banks. Citi's
main competitors for personnel were other foreign banks. To
ensure its staff acquired the skills they needed and encourage
retention, Citi dedicated enormous efforts to training. Over
the next year, it planned to provide formal training to
5,000-7,000 of GDB's 13,000 employees. Citi also ran a "farm
team" for up and coming China employees, sending them out to
other Citi worldwide operations for 3-5 years in order to expose
them to Citi corporate culture and broaden their experience. In
addition, at any given time, there were about 30 China-based
Citi employees at any time on six month out-rotations to other
offices. Citi would be delighted to showcase its China training
programs to interested USG or Chinese officials as a way to
highlight the benefits of FDI in the financial sector.
JARRETT

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