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Cablegate: Some Shanghai Banks Nervous About Us Transactions

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RR RUEHCN RUEHGH
DE RUEHGH #0411/01 2660913
ZNR UUUUU ZZH
R 220913Z SEP 08
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 7184
INFO RUEHBJ/AMEMBASSY BEIJING 2138
RUEHCN/AMCONSUL CHENGDU 1422
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHGZ/AMCONSUL GUANGZHOU 1393
RUEHHK/AMCONSUL HONG KONG 1577
RUEHSH/AMCONSUL SHENYANG 1416
RUEHIN/AIT TAIPEI 1227
RUCPDOC/USDOC WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 7771

UNCLAS SECTION 01 OF 02 SHANGHAI 000411

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STATE FOR EAP/CM, EEB, AND INR/B
STATE PASS FEDERAL RESERVE BOARDFOR JOHNSON/SCHINDLER; SAN FRANCISCO FRB FOR CURRAN/GLICK; NEW YORK FRB FOR CLARK/CRYSTAL/DAWSON
STATE PASS CFTC FOR OIA/GORLICK
CEA FOR BLOCK
USDOC FOR ITA/MAC DAS KASOFF, MELCHER AND OCEA/MCQUEEN
TREASURY FOR AMB. HOLMER, WRIGHT AND TSMITH
TREASURY FOR OASIA - DOHNER/HAARSAGER/CUSHMAN
TREASURY FOR IMFP - SOBEL/MOGHTADER
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USTR FOR STRATFORD, WINTER

E.O. 12958: N/A
TAGS: CH ECON EFIN EINV PGOV PREL
SUBJECT: SOME SHANGHAI BANKS NERVOUS ABOUT US TRANSACTIONS

1. (SBU) Summary. Some Chinese banks are refusing to increase
their exposure to U.S. bank debt since the Lehman failure,
although there does not appear to be a broad government policy
in effect, said several U.S. banks with operations in Shanghai
contacted on September 22. End summary.

Some Evidence of Chinese Bankers' Skittishness

2. (SBU) High-level executives of Citigroup, JPMorgan, and
Wachovia privately related to Econoff on September 22 that some
Chinese banks are less willing to complete transactions with
foreign banks -- especially U.S. banks, according to one contact
-- and others are refusing deals. One U.S. banker suggested
that the central authorities may have given general guidelines
to the money market desks of Chinese banks not to increase their
holdings. Another said that the Big Four Chinese banks
(Industrial and Commercial Bank of China, China Construction
Bank, Bank of China, and Agricultural Bank of China) are clearly
reluctant to make interbank loans to U.S. financial
institutions. For instance, one interlocutor said that Chinese
banks were avoiding making clearing payments through New York,
that is, not using New York-based correspondence banks to route
their transactions to third parties.

3. (SBU) Nonetheless, our interlocutors agreed that Chinese
banks' hesitation did not appear to be the result of a blanket
ban by policymakers in Beijing on business with U.S. banks. One
said that the decisionmaking appeared to be very
"decentralized," with one desk of a Chinese bank continuing to
trade normally, while another shuts down new deals. Two
interlocutors pointed to smaller Shanghai banks as most likely
to avoid business with foreign banks, based on a generally more
conservative approach.

Marginal Impact on Day-to-Day Operations

4. (SBU) There is a small -- but measurable -- impact on the
foreign banks' bottom lines. This is especially true for those
with a small local deposit base -- so-called "wholesale banks"
-- because they are almost entirely dependent on the interbank
market to fund daily operations, and the cost of borrowing is
rising.

5. (SBU) One contact said that regional interest rates have
been above historical averages for several weeks, but that this
past week was exceptional even by those standards. Rates in
East Asia have been at a premium of 30-40 basis points (Note:
One basis point is one-hundredth of a percent. End note.) above
LIBOR. Last week, this surged to 300-400 basis points above
LIBOR, before settling back down to 30-40 after the U.S.
financial action package was announced on Friday, September 19.

"This is the CBRC Calling . . . "

5. (SBU) The Shanghai branch of the China Banking Regulatory
Commission (CBRC) on September 19 contacted foreign-invested
banks for details on those banks' exposure to the Lehman
Brothers bankruptcy and the Merrill Lynch merger. CBRC has
requested a report from each bank in two parts:

-- Part one is to be a description of the impact of the
Lehman/Merrill Lynch news on the parent bank, including such
details as business transactions between the parent bank and the
two former investment banks in terms of the money market, credit
facilities, security investments, letter of credit guarantees,
and derivatives. Also, details of actions the parent bank plans
to take.

-- Part two is to be the impact on the Shanghai-based bank of
the Lehman/Merrill Lynch news, including details regarding the
money market, credit facilities, securities investment, letter
of credit guarantees, derivatives, the Qualified Domestic

SHANGHAI 00000411 002 OF 002


Institutional Investor program, as well as plans the
Shanghai-based bank intends to take.

6. (SBU) One bank took preemptive action last week, sending its
head to arrange meetings with the CBRC and the People's Bank of
China (PBOC) in Beijing. The Chinese authorities seemed
"nervous" about the international situation, and especially the
impact on Chinese retail investors, our contact said, but were
not at all concerned that Chinese domestic liquidity would
become a problem. Another contact said the Ministry of Finance
and PBOC had contacted their bank three weeks earlier to inquire
about that bank's involvement in third-party repo agreements.

Comment

7. (SBU) These latest stories from Shanghai-based U.S.-invested
banks may be the first signs of broader, longer-lasting doubts
about the U.S. financial system, which could also impact efforts
to further open the Chinese banking system to foreign
participation. So far, none of our interlocutors could point to
any silver lining in the clouds over the international financial
sector, such as Chinese plans to purchase U.S. financial
companies at cut-rate valuations.
CAMP

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