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DE RUEHGZ #1267/01 3392315
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R 052315Z DEC 07
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 6714
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEATRS/DEPT OF TREASURY WASH DC
RUCPDOC/DEPT OF COMMERCE WASHDC
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UNCLAS GUANGZHOU 001267 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM 
STATE PASS USTR 
 
E.O. 12958: N/A 
TAGS: EFIN CH
SUBJECT: Citigroup Turning Around Troubled Guangdong Development 
Bank 
 
REF: A) SHANGHAI 757, B) GUANGZHOU 850 
 
(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. 
 
¶1. (SBU) Summary: Citigroup has made impressive progress in turning 
around Guangdong Development Bank (GDB) in the year since it 
invested in the bank and installed new management.  GDB predicts a 
profit of RMB 1.67 billion (about US$230 million) for 2007 after 
sizeable losses a year earlier.  However, senior management 
described the challenges of changing a culture of lending based on 
relationships, working with the bank's Communist Party organization, 
and cooperating with investment consortium partners.  Citigroup 
hopes eventually to raise its stake in GDB to make it a platform for 
the group's expansion in China, but it also has other goals in mind 
for its investment in GDB.  End summary. 
 
Reforming a "Profoundly Troubled" Bank 
-------------------------------------- 
 
¶2. (SBU) GDB President Michael Zink described impressive progress in 
turning around what had been a "profoundly troubled" bank when he 
took the helm one year ago.  Zink, a Citigroup employee who was 
seconded to GDB after Citigroup led a consortium to purchase an 
85-percent stake in the bank, has two years left on his three-year 
contract with GDB.  He explained to us on November 23 that when the 
Chinese government founded GDB, the "Development Bank" part of its 
title wasn't just a name.  GDB was created to make loans that would 
encourage development in Guangdong Province, not necessarily loans 
that would earn money for the bank.  As a result, the most 
challenging job for the new management team, led by a small group of 
Citigroup employees, has been changing the culture of awarding loans 
based on connections, or "guanxi," and instead creating a more 
rigorous risk assessment and management system. 
 
¶3. (SBU) Zink proudly pointed to several measures of improved 
performance at GDB i the last year; most notably, the bank will 
show a profit of about RMB 1.67 billion (US$230 million) in 2007 
after a loss of more than RMB 600 million the previous year.  In 
addition, the bank aims to reduce its non-performing loan ratio 
below 3.3 percent by the end of the year, down from 6.68 percent 
when Citigroup bought its stake.  Zink also said the bank had 
significantly raised its capital adequacy ratio. 
 
With Friends Like These - The Chairman and the Party 
--------------------------------------------- ------- 
 
¶4. (SBU) Working out a modus vivendi with GDB's Communist Party 
organization has been a major challenge for the new management team, 
according to Zink.  To underscore the power of the Party 
organization within the bank, Zink speculated that if the Chairman 
of the Board of Directors, who also serves as the bank's Party 
Secretary, was forced to choose between those two titles, he would 
 
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choose to be Party Secretary.  Zink complained of the Party 
organization's lack of transparency.  In the past, the senior bank 
management and Party leadership were identical.  Now, a new group of 
top managers, including Zink, is excluded from Party deliberations. 
He commented that although the management team operated in complete 
transparency, the flow of communication between management and the 
Party went in just one direction. 
 
¶5. (SBU) Reaching an understanding on how to handle personnel 
decisions was the biggest obstacle in Party-management relations. 
Zink surmised that the ability to name appointments was probably the 
Party's most jealously guarded power within the bank.  However, 
management would be left with little real authority if it had no 
role in personnel decisions.  He explained that after a lot of 
back-and-forth on the issue, the two sides had agreed that the Party 
would nominate a single candidate for open positions and the senior 
management team would have the authority to reject candidates it 
deemed unsuitable.  There had been some positions that had taken 
more than one round of nominations to fill, but Zink believes that 
this arrangement is working fairly well. 
 
With Friends Like These - Partners and Competitors 
--------------------------------------------- ----- 
 
¶6. (SBU) In addition to working with the Party structure, the team 
from Citigroup has faced challenges in working with its investment 
consortium partners.  Because it is restricted as a foreign 
investor, Citigroup owns only 20 percent of GDB.  IBM, the other 
foreign investor, owns just under 5 percent.  The three Chinese 
 
partners, China Life, Citic Trust and State Grid Corporation, each 
own about 20 percent.  Zink described both IBM and State Grid, an 
electric power company, as financial investors with little interest 
in playing a management role.  He said Citic Trust, as a financial 
services firm, had the potential to become a strategic investor but 
for now had kept a low profile. 
 
¶7. (SBU) China Life, on the other hand, has behaved more like a 
strategic investor and potential competitor with Citigroup for 
control of GDB, according to Zink.  He believes that since China 
Life's main competitor, Ping An Insurance, bought a controlling 
stake in Shenzhen Commercial Bank, China Life has been eager to 
enter the banking sector and sees GDB as an important platform.  He 
commented that some disagreements attributed to "cultural 
differences" among the consortium partners were more about 
controlling the management of GDB.  However, Zink acknowledged that 
the decision to market China Life insurance products through GDB 
branches and a GDB-China Life co-branded credit card had been 
successful. 
 
Playing Nice with the Regulators 
-------------------------------- 
 
¶8. (SBU) Zink said that GDB's new management team had been proactive 
in working closely with the China Banking Regulatory Commission 
(CBRC) about reform and development plans for the bank.  GDB has 
notified CBRC well in advance of any changes at the bank.  After 
pushing forward rapidly with reforms in the early stages of the 
takeover, Zink and his managers decided to slow down the pace of 
change to give CBRC more time to absorb their plans.  Zink pointed 
out that because of the foreign stake in GDB, CBRC monitors it more 
closely than most Chinese banks. 
 
Planning for the Future 
----------------------- 
 
¶9. (SBU) Looking forward, Zink told us that Citigroup hopes it might 
eventually be able to raise its stake in GDB and use it as a 
platform to extend the group's reach into China's second- and 
third-tier cities.  However, he explained that even if Citigroup is 
not permitted to increase its stake, the investment could still be a 
success for the group.  To begin with, he believes that changes at 
GDB have already substantially raised the value of Citigroup's 
investment in the bank.  In addition, Zink said the venture was 
helping Citigroup achieve more abstract goals: learning more about 
China's banking market and demonstrating Citigroup's commitment to 
strengthening China's financial system. 
 
GOLDBERG