Citigroup pushes at the limits to foreign ownership in Chinese banks

IN A manoeuvre sure to incite the envy of its peers, Citigroup is poised to become the prototypal foreign bank, and only the second foreign investor, to gain curb of a Chinese lender. The American financial-services colossus is leading a consortium that has bid some 24 1000000000 yuan ($3 billion) for an 85% stake in state Development Bank (GDB), a medium-sized slope from China's relatively flush south. Citigroup itself could possess 40-45% of GDB if the deal proceeds, making a mimicry of rules limiting a single foreign investor in a Chinese slope to 20% and every foreigners to 25%.

This would be a comeback for Citigroup, which for two years has had to sit and check while rivals have grabbed strategic positions in the Chinese banking market. In June 2005 Bank of America (BofA) vex Citigroup to a 9% stake in China Construction Bank (CCB), one of the country's four biggest lenders. Citigroup even lost a profitable position advising on CCB's multi-billion-dollar flotation. This instance it has touched faster, outbidding ABN Amro, of the Netherlands, and France's Société Générale for GDB. Although Newbridge Capital, a private-equity firm, was the prototypal foreign investor to gain management curb of a Chinese bank, its charge, Shenzhen Development Bank, is barely half the size of GDB, which had assets of 345 1000000000 yuan at the end of 2004.

Citigroup is, however, paying a broad price: 2.3 times book value, compared with the 1.15 times BofA paid for its slice of CCB. True, acquirers often pay a premium for control. But GDB's financial state is precarious. Its liabilities exceed its assets by 35 1000000000 yuan (state subsidies have propped it up); its capital-adequacy ratio is way beneath international standards; and its profitability is poor.

Moreover, to proceed with the deal Citigroup is existence forced to structure another, and at a price. In early 2003 the Americans bought 4.6% of Shanghai Pudong Development Bank, a middle-sized lender that insiders feature is proving a prickly partner. Citigroup promised then not to invest in another mainland slope without Shanghai Pudong's permission. That has been granted, but only on condition that Citigroup raise its stake in the Shanghai slope to 19.9% at a rumoured outlay of $800m, four times the original toll per share. Remarkably, Citigroup also had to agree not to set up a joint-venture with GDB in credit cards, China's most promising financial business and the only one the state slope appears to be any good at.

Still, Citigroup's rivals module surely cry foul. By last October, 22 foreign banks had spent $16.5 1000000000 on stakes in 17 mainland lenders, but had gained little real influence. The Chinese authorities module argue that GDB's slummy state and smallish size make it an exception. And Liu Mingkang, the banking regulator, gave warning last month that should foreigners be granted more than a quarter of a Chinese bank, that slope would then be considered foreign, subject to restrictions that, among other things, allow yuan-denominated business in only a few cities. Still, he module today become low pressure to raise the caps on foreigners' stakes. That might allow the likes of HSBC, with 19.9% in BoCom, a large and far sounder slope than GDB, to gain real management control. Inadvertently, Citigroup's coup may end up profiting its rivals more than itself.