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UNCLAS SECTION 01 OF 03 BEIJING 008473 
 
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E.O. 12958: N/A 
TAGS: EFIN EINV PGOV CH
SUBJECT: Foreign Investors Lining Up to Invest In China 
Banks; Two More Preparing for Hong Kong IPOs 
 
 
THIS MESSAGE IS SENSITIVE BUT UNCLASSIFIED.  PLEASE HANDLE 
ACCORDINGLY.  NOT FOR DISTRIBUTION OUTSIDE USG CHANNELS. 
 
¶1.  (SBU) Summary:  In a meeting on April 18, Xie Ping, CEO 
of China SAFE Investments (aka "Huijin"), told a group of 
New York Federal Reserve Bank analysts that he is seeing 
more and more international interest in investing in 
Chinese banks.  The successful Hong Kong listings of Bank 
of Communications (BoCom) and China Construction Bank (CCB) 
in 2005 have set the stage for the listings of the Bank of 
China (BOC) in early June and the Industrial and 
Commercial Bank of China (ICBC) at the end of 2006.  Xie 
pointed out that strategic investors bring important 
credibility to the listing, noting that Bank of America's 
investment in CCB was critical for the IPO?s success.  Xie 
suggested Citigroup's interest in the Guangdong Development 
Bank is because of its failure to conclude a deal with CCB. 
Although three of the four big banks have been 
restructured, governance remains a major concern.  The 
fourth bank, the Agricultural Bank of China (ABC) will be a 
bigger challenge and require a much larger 
recapitalization.  Xie also cited rural finance and the 
securities sector as key areas of concern.  End summary. 
 
International Investor Interest 
------------------------------- 
 
¶2.  (SBU) On April 18, a group of New York FRB analysts met 
with Xie Ping, the CEO of Huijin, the holding company set 
up by the Chinese Government to manage its stakes in the 
large Chinese commercial banks that have been restructured. 
Xie said that since the spectacular success of the CCB 
listing (in Hong Kong), more and more international 
investors have come to China seeking to buy into Chinese 
banks.  Over 50 foreign banks have either concluded 
investment deals or are currently in negotiations.  Xie 
confirmed reports that BOC will list by late May/early June 
and ICBC before the end of 2006.  However, before these two 
banks list, there is still a great deal of work to do.  The 
auditors are checking everything on the financial 
statements to make sure they meet the international 
standard. 
 
¶3.  (SBU) Xie said the strategic investors in the state- 
owned commercial banks (SCBs) have been critical to the 
success of the listings.  So far, two of the large SCBs 
with strategic investors have listed in Hong Kong: BoCom, 
of which HSBC owns 19.9 percent, and CCB, of which Bank of 
America owns 10 percent.  He noted that there is still much 
opposition to allowing foreign investors to invest in 
Chinese banks.  However, he argued, without the BofA 
investment, the CCB IPO would never have been so 
successful.  Those who complain about selling stakes in 
Chinese banks too cheaply forget just how much money the 
Government made with CCB's IPO.  With CCB's 2005 annual 
report, Xie argued that CCB's level of disclosure is 
already approaching the international standard.  Although 
there are 220,000 investors in CCB, most of them are 
foreign mutual funds. 
 
Technical Assistance from Strategic Investors 
--------------------------------------------- 
 
¶4.  (SBU) Strategic investors contribute more than just 
money, Xie stressed.  Each of the strategic investors in 
CCB, BOC and ICBC (respectively, Bank of America and groups 
led by Royal Bank of Scotland and Goldman Sachs) paid 
around US$3 billion, but also pledged to provide technical 
assistance.  Xie said CCB currently has around 50 advisers 
from BofA working fulltime on technical assistance 
projects.  He said the focus of the BofA advisers is on 
risk management, information technology and credit cards. 
 
Citigroup's Last Chance 
----------------------- 
 
¶5.  (SBU) Xie said he views Citigroup's current bid for the 
Guangdong Development Bank (GDB) as an effort to recover 
from its failed bid to become a strategic investor in CCB. 
When Citigroup was still negotiating with CCB, Xie said it 
had nine branches and a longstanding interest in the 
Shanghai Pudong Development Bank.  Consequently, after 
 
BEIJING 00008473  002 OF 003 
 
 
making an investment in CCB, it would also become a CCB 
competitor.  Because of this, the deal broke down at the 
last minute.  Xie said that BofA then appeared as an 
alternative suitor, and CCB was able to seal a deal. 
Unlike Citigroup, BofA agreed to close down the retail 
banking operations at its three China branches.  Because 
the Royal Bank of Scotland does not have a presence in 
China, this was not an issue for its investment.  Xie said 
Citigroup has regretted losing out on the CCB deal ever 
since and saw GDB, a "very bad bank," as a last opportunity 
to get into the market. 
 
¶6.  (SBU) As for the lifting of foreign investment caps in 
Chinese banks, Xie noted that China Banking Regulatory 
Commission Vice Chairman Tang Shuangning had recently made 
a public statement on the subject.  In his statement, Tang 
suggested that it was not imperative that the Government 
have majority ownership of more than the five largest 
state-owned banks.  Xie said he thought that sounded 
correct.  In his view, majority ownership is 51 percent. 
 
Governance the Problem 
---------------------- 
 
¶7.  (SBU) Xie said the biggest challenge for Chinese banks 
is corporate governance.  Although the Communist Party has 
power over key personnel decisions, board directors are now 
more powerful than ever and can almost rival the power of 
the party.  In the case of CCB Chairman Guo Shuqing, he is 
also the Party Secretary for the bank.  Xie said the CCB 
management and board of directors cooperate quite well, but 
at BOC and ICBC there are many disagreements.  In Xie's 
view, major decisions should be made by the shareholders. 
Although Huijin is the largest shareholder of all three 
banks, Xie said Huijin encourages competition between the 
banks because its greatest concern is the size of the 
dividends it receives.  Huijin has six directors on the 
boards of each bank.  For important decisions on management 
appointments, the budget, etc., Xie said he consults with 
the directors, but for other issues, he lets the Huijin 
directors make the calls. Xie noted that all three banks 
have major international figures on the boards. 
 
State Bank Restructurings 
------------------------- 
 
¶8.  (SBU) Regarding the status of plans to reform ABC, the 
last of the four SCBs, Xie acknowledged that ABC represents 
a major moral hazard problem.  He noted that with 400,000 
employees, ABC may need a different approach.  Moreover, as 
ABC has RMB 500 billion in NPLs, the recapitalization will 
need to be much larger.  Whether forex reserves are used 
(as in the recapitalizations of CCB, BOC and ICBC) is a 
question that will be decided at the most senior levels of 
the Government.  Some have said ABC is too large and needs 
to be broken up into several smaller banks.  Maybe the good 
bank/bad bank model would be best.  Xie said Premier Wen 
Jiabao has not yet decided on the right approach.  In his 
view, if the Government does not begin the reform process 
at ABC during 2006, it will have to be postponed until 
after the 17th Party Congress (in the fall of 2007). 
 
¶9.  (SBU) Commenting on the recapitalization of ICBC, the 
most recent bank to receive capital from the central 
government, Xie said the complicated recapitalization 
process involved around RMB 270 billion in bonds for loss 
loans and around RMB 450 billion in separate PBOC 5-year 
bonds for doubtful loans.  In fact, Xie reported, he has 
been called to testify before the National People's 
Congress (NPC) on May 9 on the way in which the banks were 
recapitalized.  He noted that the NPC had earlier expressed 
resentment at the capitalization of the banks using foreign 
exchange reserves, claiming that the use of forex reserves 
should also require NPC approval.  (Note:  When the PBOC 
used $45 billion in forex reserves at the end of 2003 to 
recapitalize CCB and BOC, it did so without consulting the 
NPC.  End note.) 
 
Rural Finance Problem 
--------------------- 
 
¶9.  (SBU) Xie said (former Premier) Zhu Rongji had three 
 
BEIJING 00008473  003 OF 003 
 
 
goals for the financial sector:  reform the banking sector, 
deal with the state-owned shares in listed companies and 
reform the exchange rate.  Xie said he is impressed with 
the current Government's record in dealing with these three 
areas, but he believes rural finance remains a serious 
problem.  He noted that the Rural Credit Cooperatives 
(RCCs) have been undergoing reform for three years, and 
that the Government has already provided RMB 116 billion to 
cover half of their NPLs. 
 
Securities Markets 
------------------ 
 
¶10.  (SBU) Another area of concern is the securities 
market.  Xie said he is currently the head of four 
securities companies.  Although Huijin currently controls 
these firms, Xie said he hopes to relinquish control soon -- 
hopefully, by selling them to foreign investors.  Xie said 
it was the State Council that decded that the big 
securities firms needed to be rescued.  Consequently, 
Huijin has injecte RMB 17 billion into the securities 
firms, with RMB 7 billion injected into Yinhe (Galaxy) 
ecrities alone.  The funding for these recapitlizations 
came from the investments received from BofA and RBS. 
 
¶11.  (U) This report was cleared by the New York FRB 
Delegation. 
 
RANDT