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Cablegate: Foreign Banks: Optimistic About Profits, but Face Hurdles

VZCZCXRO3810
RR RUEHCN RUEHGH RUEHVC
DE RUEHGZ #0850/01 2080515
ZNR UUUUU ZZH
R 270515Z JUL 07
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 6313
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEAIIA/CIA WASHDC
RUEKJCS/DIA WASHDC

UNCLAS SECTION 01 OF 02 GUANGZHOU 000850

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: WTRO ECON PGOV CH
SUBJECT: Foreign Banks: Optimistic About Profits, but Face Hurdles

(U) THIS DOCUMENT IS SENSITIVE BUT UNCLASSIFIED. IT SHOULD NOT BE
DISSEMINATED OUTSIDE U.S. GOVERNMENT CHANNELS OR IN ANY PUBLIC FORUM
WITHOUT THE WRITTEN CONCURRENCE OF THE ORIGINATOR. IT SHOULD NOT BE
POSTED ON THE INTERNET.

Business Sensitive

1. (U) SUMMARY: Fierce competition from Chinese banks, a constantly
changing regulatory environment, and difficulties in working with
Chinese shareholders are the key challenges confronted by local
government and foreign bankers in south China. Despite their
concerns, the foreign banking community remains optimistic about
profitability and future reforms. END SUMMARY

Regulatory Hurdles
-------------------

2. (SBU) Banking officials report that foreign banks face a variety
of regulatory challenges that do not apply to locally-incorporated
foreign backs, Chinese banks, or to joint ventures with Chinese
banks. For example, foreign banks are allowed to open any number of
sub-branches but each bank is only permitted a single branch in each
city. Moreover, each sub-branch requires an approval process that
takes at least three months. The bankers noted positively that
foreign banks can now offer credit card services and RMB-based
financial services to Chinese residents and institutions. However,
Bank of America's Guangzhou Branch Manager Julia Yu said that
foreign bank branches may only conduct RMB business with individuals
who make a term deposit in excess of RMB 1 million (roughly UDS
132,000), a not inconsiderable sum. Domestic banks have no such
requirement.

3. (SBU) Milson Lau, General Manager of Guangzhou Branch, Citibank
(China) Company, told us that some directives from the Chinese
Banking Regulatory Commission (CBRC) were so unclear that he was
forced to seek CBRC advice to ensure full compliance. Lau noted
that domestic banks were more flexible than their foreign
counterparts in interpreting and following CBRC directives, even to
the extent of skirting around inconvenient requirements. He
lamented that this unfair competition had led to customer complaints
and lost business when foreign banks attempted to comply fully with
CBRC requirements. Yu added that foreign banks find it difficult to
keep track of the constantly changing regulations, amendments, and
new interpretations of the law. She believes frequent regulatory
changes increase the risk of non-compliance by foreign banks.

4. (SBU) Yu also complained that certain regulations may appear
beneficial to foreign banks on paper, but in reality they are
restrictive. She cited as an example a circular issued by the State
Administration of Foreign Exchange (SAFE) requiring foreign banks to
reduce foreign debt balances to 60 percent of the 2004 quota. Yu
pointed out that although Chinese banks must reduce their foreign
debt to 30 percent of the 2004 quota, domestic banks still have the
advantage of large deposits to support loans. In contrast, her
branch relies heavily on borrowing from overseas banks to support
loans. SAFE's method of determining the foreign debt quota, in her
view, was unfair to foreign banks.

Local Shareholder Woes
----------------------

5. (SBU) Commenting on shareholder relations, Guangdong Development
Bank (GDB) Deputy President Daniel Massey specifically said that
shareholders not fulfilling contractual obligations and their
interfering in day-to-day operations as the two biggest problems.
According to Massey, China Life -- one of the major shareholders of
Guangdong Development Bank -- causes him the most trouble. He said
that China Life requested that eight senior management staff from
Citigroup quit and be compensated by GDB; this was clearly against
contract terms. Regarding day-to-day operation, Massey gave
examples of the GDB Chairman using party connections, unions, and
the company's structure to thwart Citigroup's attempts to bring GDB
in line with international banking standards. In the past, the
chairman of GDB had denied Citigroup access to GDB's scoring model
for its credit card business by declaring it to be proprietary
information and a "state secret." In another instance, he used the
Party to directly threaten two local staff working closely with
Massey on corporate management risk. Moreover, when the chairman is
not playing a direct role, GDB branches act like individual
fiefdoms, with a Party-appointed general manager in absolute control
of each.

CBRC Can Be Helpful
-------------------

6. (SBU) On a positive note, both Lau and Yu provided examples of
how the CBRC had become more professional and helpful over time.
Lau said the approval procedure for Citibank's incorporation was
amazingly smooth and fast due to the CBRC's help in obtaining the
"flexibility" of ten other official bureaus. He believes this

GUANGZHOU 00000850 002 OF 002


demonstrated China's willingness to liberalize the banking sector.
Yu said the CBRC showed professionalism and efficiency in the review
and approval of her branch's RMB retail business. CBRC officials
made a site visit to ensure that equipment was in place, the staff
was well trained, and to solicit feedback from the bank.

Domestic Banks Are Competitive
------------------------------

7. (SBU) Lau described domestic banks' branch networks as "strong,"
and added that four of the five big publicly-traded banks had
improved their corporate governance and made their lending more
accountable. Both Lau and Yu agreed that domestic banks are keen to
learn and adopt modern practices from foreign banks. Yu said that
China Construction Bank is following Bank of America's model of
functional management, which has staff report directly to the
product manager, rather than to the branch manager. Both Lau and Yu
believe that domestic banks currently face reduced government
pressure to lend for policy projects.

A Profitable Future in Chinese Banking
--------------------------------------

8. (SBU) Despite the current difficulties, the foreign bankers all
were optimistic about doing business in China. Yu, whose branch
hopes to hit 50 percent annual growth this year, said that given
China's double-digit GDP growth, it is hard to find a bank that is
losing money.

CBRC: Agriculture Bank Next in Line for Reform
--------------------------------------------- -

9. (SBU) Deputy Director General of CBRC's Guangdong Office Meng
Jianbo cautioned that some banking experts believe China is opening
up too fast. To maintain rapid and healthy development of the
banking sector, he said that reform of China's Agriculture Bank
would be CBRC's next focus. In the future the Agriculture Bank will
mainly serve the countryside, farmers, and the agricultural sector.
The CBRC also plans to support micro-finance to small workshops,
plantations, farms and to other small- and medium-sized businesses
by providing guidance to banks, offering favorable tax policies for
SME loans, and implementing an improved accountability system.

GOLDBERG

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