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