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R 220914Z NOV 06
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 5488
INFO RUEHOO/CHINA POSTS COLLECTIVE
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RHHMUNA/HQ USPACOM HONOLULU HI

UNCLAS SECTION 01 OF 02 GUANGZHOU 032315 
 
SIPDIS 
 
USDOC FOR DAS LEVINE AND ITA/MAC/AP/MCQUEEN 
TREASURY FOR OASIA/ISA KOEPKE AND DOHNER 
STATE PASS CEA FOR BLOCK 
STATE PASS FEDERAL RESERVE BOARD FOR JOHNSON/SCHINDLER 
STATE PASS SAN FRANCISCO FRB FOR CURRAN 
STATE PASS NEW YORK FRB FOR DAGES/CLARK 
STATE ALSO PASS USTR STRATFORD/WINTER/MCCARTIN 
PACOM FOR FPA 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EINV WTRO CH
SUBJECT: Guangdong Development Bank: A Benefit or a Burden? 
 
REFERENCE: Guangzhou 30413 
 
(U) This message is sensitive but unclassified.  Please handle 
accordingly. 
 
¶1. (SBU) SUMMARY: Citibank's Guangzhou branch manager said the 
Citibank-led bid for Guangdong Development Bank (GDB) is a "done 
deal" and that Citibank will gain significant management control 
over GDB as a result.  Bank of America and Deutsche Bank 
representatives said Citibank would benefit from GDB's extensive 
branch network in the Pearl River Delta, but differed on whether it 
would gain the management control it wants.  Media commentators 
opined that GDB was one of the last good investments for foreign 
banks and doubted that China would raise its foreign ownership cap 
anytime soon.  END SUMMARY. 
 
Background on the Deal 
---------------------- 
 
¶2. (SBU) GDB was founded in 1988 by the Guangdong provincial 
government and was one of the earliest joint-stock commercial banks 
to offer a full range of financial services nationwide. The bank 
reportedly has over 500 branches, primarily in Guangdong's booming 
Pearl River Delta, and total assets of almost RMB 400 billion. The 
bank's non-performing loan rate is reportedly close to 20 percent. 
In 2004, GDB offered up 85 percent of its shares to outside 
investors.  Citigroup originally aimed to take 40 to 45 percent of 
the bank, but later revised its proposal to 20 percent after the 
State Council refused to make an exception to the foreign ownership 
cap of 20 percent. 
 
Citibank's Guangzhou Branch: Guarded but Optimistic 
--------------------------------------------- ------ 
 
¶3. (SBU) Milson Lau, Citibank's Guangzhou Branch Manager, said that 
although the November 16 agreement reached between the Citibank-led 
consortium and Guangdong Development Bank is a preliminary 
agreement, it represents a "done deal" and has the tacit approval of 
the Guangdong and central governments.  The signed agreement 
includes a list of terms that must be met before a final agreement 
is reached in December 2006, including capital transfers, but Lau 
did not see them as barriers.  He characterized the deal as the 
first time a foreign bank has taken significant management control 
of a domestic bank.  He was careful to note, however, that he was 
not part of Citibank's GDB task force, nor is he closely acquainted 
with GDB managers.  Regarding impending management changes in GDB, 
Lau did not provide specifics but did say they would likely take 
place at high levels. 
 
Other Foreign Banks: Mixed Reviews 
---------------------------------- 
 
¶4. (SBU) Julia Yu, Bank of America's Guangzhou branch manager, said 
she expects that Citibank will have significant management control 
over GDB.  She contrasted this with Bank of America's relationship 
with China Construction Bank (of which Bank of America owns nine 
percent).  According to Yu, Bank of America is not involved in CCB's 
management, but rather provides training to branch-level offices on 
issues such as retail business.  She noted that China Construction 
Bank is a national-level bank, and thus less flexible than a 
regional bank such as GDB.  She expressed some surprise that Chinese 
authorities approved the deal, characterizing Citibank as a "tiger." 
 She said Citibank's primary objective in the deal is to obtain 
GDB's extensive branch network. 
 
¶5. (SBU) Myron Shi, Deutsche Bank's Guangzhou branch manager, said 
GDB will prove to be an enormous burden for Citibank and will not 
generate the profits that some expect.  With new foreign banking 
regulations released on November 15 (see septel), Shi said foreign 
banks are better off opening wholly foreign-owned branches and 
sub-branches on their own terms.  He noted that Deutsche Bank bought 
10 percent of regional bank Huaxia in early 2006 but has not gained 
significant management control.  In addition, he cited conversation 
with managers from the Bank of Communications in which they downplay 
the role of shareholder HSBC in day-to-day operations. 
 
Media: Time to Look Further Afield 
---------------------------------- 
 
¶6. (SBU) According to an article on China Finance Net, (a news 
 
GUANGZHOU 00032315  002 OF 002 
 
 
website that is overseen by the People's Bank of China and the China 
Banking and Regulatory Commission) GDB is one of the last 
significant Chinese banks without a foreign partner.  Most joint 
stock commercial banks with assets of between RMB 300 billion and 
RMB 500 billion already have foreign stakeholders.  In the future, 
it says, foreign banks may look to agricultural commercial banks as 
new investment targets.  The article cites sources close to the 
bidding process saying that 2006 will not see China ease the 20 
percent cap on a single foreign investor in a domestic bank. 
 
ROCK