VZCZCXRO5458
RR RUEHCN RUEHGH
DE RUEHGH #0504/01 2210607
ZNR UUUUU ZZH
R 090607Z AUG 07
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 6120
INFO RUEHBJ/AMEMBASSY BEIJING 1316
RUEHCN/AMCONSUL CHENGDU 0808
RUEHGZ/AMCONSUL GUANGZHOU 0788
RUEHHK/AMCONSUL HONG KONG 0928
RUEHSH/AMCONSUL SHENYANG 0810
RUEHIN/AIT TAIPEI 0647
RUEHGP/AMEMBASSY SINGAPORE 0067
RUEHKO/AMEMBASSY TOKYO 0171
RUEHUL/AMEMBASSY SEOUL 0093
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 6567

UNCLAS SECTION 01 OF 03 SHANGHAI 000504 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/ALTBACH/READE 
STATE PASS FEDERAL RESERVE BOARD FOR JOHNSON/SCHINDLER; SAN 
FRANCISCO FRB FOR CURRAN; NEW YORK FRB FOR CLARK/CRYSTAL/MOSELEY 
CEA FOR BLOCK 
USDOC FOR ITA/MAC DAS KASOFF, MELCHER AND MCQUEEN 
TREASURY FOR OASIA - DOHNER/BAKER/CUSHMAN 
TREASURY FOR WRIGHT AND AMB HOLMER 
NSC FOR WILDER AND TONG 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV CH
SUBJECT: CITIBANK'S LOCAL INCORPORATION PROBLEMS 
 
REF: A) SHANGHAI 478; B) SHANGHAI 161; C) GUANGZHOU 850 
 
(U) This cable is sensitive but unclassified and for official 
use only.  Not for distribution outside of USG channels or via 
the internet. 
 
¶1. (SBU) Summary:  In a meeting with Federal Deposit Insurance 
Chairman (FDIC) Sheila Bair on July 26, Citibank (China) Chief 
Executive Officer Richard Stanley opined that  the China Banking 
Regulatory Commission was "making it up as they went along" with 
regard to the treatment of newly locally-incorporated foreign 
banks such as Citibank.  Citibank was facing unprecedented level 
of intrusiveness and forced change on the bank.  Citi was still 
not permitted to issue a debit card to its RMB customers and was 
experiencing management problems with its partners at the 
Guangdong Development Bank.  According to American businessmen 
who participated in a roundtable with Bair,  China faced 
enormous challenges overcoming the risks associated with 
corruption in designing and implementing a banking deposit 
insurance program.  End Summary. 
 
¶2. (SBU) Federal Deposit Insurance Corporation (FDIC) Chairman 
Sheila Bair met with Citibank (China) Chief Executive Officer 
Richard Stanley and Citibank Director of Government 
Affairs-China Vice President Jie Huang on July 26.  Also, on 
July 26, Chairman Bair attended an Amcham-hosted business 
roundtable.  Chairman Bair was joined during her July 26-27 
visit to Shanghai by FDIC Vice Chairman Martin Gruenberg, FDIC 
Director of International Affairs Fred Carns and FDIC Chief of 
Staff Jesse Villarreal.  Chairman Bair's July 27 meeting at the 
Shanghai Stock Exchange was reported Ref A; other FDIC 
delegation meetings will be reported septel. 
 
--------------------------------------------- 
Citibank Not Pleased With Local Incorporation 
--------------------------------------------- 
 
¶3. (SBU) Citibank's Stanley said that Citi was "not pleased" 
with having been required to incorporate locally as a Chinese 
bank due to the "challenging complexities" this change had 
created.  Stanley was optimistic, however, that Citibank could 
work through these complications.  He reiterated to Chairman 
Bair his previously reported (Ref B and previous) view that any 
bank not already in China would find it prohibitively costly to 
set up business here due to Chinese regulations. 
 
¶4. (SBU) Stanley said that in terms of how to treat the newly 
locally-incorporated foreign banks, the China Banking Regulatory 
Commission (CBRC) was "making it up as it went along."  He said 
that while the CBRC had initially approved the names submitted 
to act as Citibank's independent board in China, Citibank 
recently was told that the board needed to include "a Mainland 
person," and that the CBRC was again reviewing Citi's board 
membership. 
 
¶5. (SBU) "The CBRC is pushing a level of intrusiveness and 
forced changes on Citibank" that Stanley had not expected. 
Citibank was being forced to adopt Chinese banking practices 
"immediately."  Stanley said that Citibank was also facing 
interference from non-CBRC officials as well.  He said, for 
example, that the local police had inspected a Citibank branch 
in a second-tier city and informed Citibank that they needed to 
construct a different style vault for "security reasons." 
 
¶6. (SBU) Despite being forced to act as a local Chinese bank, 
Stanley said that Citibank was still not able to issue debit 
cards to its RMB deposit customers.    Stanley said that despite 
the facts they were locally incorporated and therefore a 
"Chinese bank" and should be able to issue debit cards like 
every other Chinese bank, but the regulators "wanted to slow 
Citi's growth and restrict capital inflows."  The excuse given 
by the CBRC to deny Citibank's issuance of the cards was that 
 
SHANGHAI 00000504  002 OF 003 
 
 
the People's Bank of China (PBOC) had some unspecified 
"certification test" that Citi needed to pass.  No one at either 
the CBRC or the PBOC, however, "knew what the test was."  While 
he expected this issue to be resolved soon, he said it was clear 
that the CBRC was using stalling tactics to enable Chinese banks 
to "get there before the foreign competition." 
 
¶7. (SBU) Nevertheless, Stanley said, "the good news is that the 
market is hot and we are making money." 
 
---------------------------------------- 
Problems With Guangdong Development Bank 
---------------------------------------- 
 
¶8. (SBU) Stanley said that Citibank's investment in the 
Guangdong Development Bank (GDB) had not gone as smoothly as he 
had hoped.  Citibank had "management influence" at GDB, "but not 
control."  "There have been some issues with our consortium 
partners and resistance to change," he said.  There had been 
problems with GDB's Communist Party Committee as well.  (Note: 
See Ref C.  End note.) 
 
¶9. (SBU) Eight of the top 13 people at GDB are seconded-Citibank 
employees; this gives Citibank "blocking rights, but not 
outright control."  GDB was now capitalized to 6+ percent and 
had an non-performing loans (NPL) book of only 5 percent. 
Stanley expected that GDB would be capitalized to 7.2 percent by 
the end of 2007.  Since Citibank and its partners took it over, 
GDB has earned $300 million in profits and was in the process of 
raising more capital. 
 
--------------------------------- 
Recapitalizing Rural Cooperatives 
--------------------------------- 
 
¶10. (SBU) Responding to a query from Chairman Bair, Stanley said 
that there was "tremendous interest" by foreign capital to enter 
China's financial sector.  Given the difficulties and barriers 
that banks not already present in China would face entering the 
market, Stanley believed that there would be banks interested in 
recapitalizing and consolidating China's ailing rural 
cooperatives.  This would be the "best way for the next wave of 
foreign banks to get a piece of China's banking sector.  But 
this would be very hard to do organically," he said. 
 
¶11. (SBU) Citibank had already brought some if its India-based 
employees to China to discuss their success with similar 
programs in India.  However, the challenges, such as management 
controls, accountability, and finding appropriately-trained 
staff to live and work in these areas would be immense. 
Furthermore, Stanley doubted that regional governments would be 
willing to sever their controlling ties over the local banks. 
"Not in this generation; it is not going to happen," he said. 
 
--------------------------------------------- ---- 
Implementing Deposit Insurance Would Be Difficult 
--------------------------------------------- ---- 
 
¶12. (SBU) Chairman Bair discussed China's business climate and 
China's need for a deposit insurance system with U.S. businesses 
at a roundtable hosted by the American Chamber of Commerce 
(Amcham) on July 26.  Also attending was KPMG Assistant Manager 
Paul Watson, Javelin Investments Chairman Kim Woodard, ChinaVest 
Senior Vice President Erik Bethel, Huangpu Enterprise 
Development Corp. CEO Eugene I-Chun Wang, AIU Insurance Shanghai 
Branch Assistant Vice President Eric Zhang, and Bank of America 
Senior Vice President Leehun M. Lee. 
 
¶13. (SBU) Chinavest's Bethel said that the Chinese government 
had undergone a "tectonic shift" from ownership of the means of 
production to a regulator over independent companies.  Every 
 
SHANGHAI 00000504  003 OF 003 
 
 
bank wanted to follow the success of the Industrial and 
Commercial Bank of China (ICBC) and list on the market.  Banks 
therefore need to "clean themselves up" and deal with their 
nonperforming loans and other structural problems.  The stock 
market was a catalyst promoting banking sector reform.  A 
deposit insurance system for banks in China would be a 
beneficial step for both banks and the government, he said. 
 
¶14. (SBU) Javelin Investment's Woodard agreed, but noted the 
"serious risk of corruption in the system."  He outlined as one 
of China's endemic problems the fact that there was a serious 
disconnect between rules and regulations and actual behavior. 
Strong and independent regulatory oversight of the bank deposit 
insurance program would be one solution to this problem, "but it 
was difficult to envisage how this would be executed," he said. 
 
¶15. (SBU) Huangpu Enterprise Development Corp.'s Wang noted that 
under the current system, bank customers assumed that the 
government would guarantee their savings even if the bank lost 
money due to corruption and embezzlement.  This was one reason 
why Chinese continued to put money into savings accounts despite 
the zero percent real interest rate they earned on these 
deposits. 
SCHUCHAT