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