Citigroup caught in Beijing
tussle By Sue Anne Tay
Foreign investors in China's bank sector,
especially US bank giant Citigroup, have been
confused by the mixed signals Chinese banking
regulators have sent regarding caps on foreign
investment in domestic banks over the past few
weeks.
On April 20, Lai Xiaomin, the
deputy general of the China Banking Regulatory
Commission (CBRC), disappointed many aspiring
investors by announcing that regulators would not
change current rules limiting foreign investments
in domestic banks to 25%. Lai told Reuters, "If a
foreign bank is to invest in a Chinese bank,
no
matter if [that bank] is big
or small, they will be subjected to the current
investment caps."
Yet, only 10 days
earlier, Tang Shuangning, the vice chairman of the
CBRC, had announced that the Chinese government
might be willing to loosen its control of the
banking sector by allowing the sale of controlling
stakes in small and medium-sized lenders once
owned exclusively by the government.
When
Lai was reminded of Tang's earlier statements, he
replied by saying it was "a slight
misunderstanding" and offered little elaboration.
During the press conference on April 20, Lai
insisted his comments should not be taken to apply
to any particular bank.
However, on April
25, Lai told the public that a letter had been
sent to the Guangdong provincial
government stating that the CBRC had reviewed the
Guangdong Development Bank (GDB) case "many times"
and found it "hard to break the present
restrictions on foreign strategic investor
issues".
With that announcement, the
government seemed to put Citigroup's ambitious bid
for GDB, widely seen as a litmus test for
increasing foreign ownership of state bank stakes,
into a state of indefinite limbo.
Since
last December, Citigroup had been waiting for
government approval for a bid to own an individual
stake of 40% in GDB, as a party to a larger
consortium bidding for 85% of the bank. A keen
suitor of the troubled Chinese bank, Citigroup was
willing to pay three times the book value for GDB
and even surrendered its status as the largest
shareholder in Shanghai Pudong
Development Bank (SPDB) to be allowed to invest in
GDB.
It was widely assumed by industry
observers that an implicit bargain had been struck
between Citigroup and the Guangdong authorities in
which, in exchange for unburdening Guangdong by
investing in what was widely considered to be one
of the worst-performing lenders in the region,
Citigroup would be allowed a majority stake which
would give it unquestioned authority to
drastically restructure the bank along US
operational lines.
The boldness of
Citigroup's bid was somewhat reassuring to many
foreign investors. It was believed that Guangdong
officials had initially quietly endorsed the
proposal before Citigroup approached Beijing.
Given GDB's poor financial condition, and the slow
progress of past efforts by provincial authorities
to offload over $4 million of the bank's
non-performing loans, it was evident local
authorities were eager to, in effect, outsource
reform.
Combined with a then-positive
official atmosphere towards a rapid pace of bank
reform, many believed that a successful Citigroup
takeover of GDB would eventually lead to a
country-wide lifting of foreign investment caps on
banks.
But vigorous lobbying efforts
apparently did little to change the minds of
regulators. A decision over the GDB bid was
repeatedly delayed as the State Council continued
to mull over the issue, the delay indicative of
the weighty impact a revision of policy could have
on the landscape of the Chinese banking sector.
During the seven months that passed
between the initial bid and Tuesday's
announcement, Citigroup chief executive officer
Charles Prince and Richard Stanley, the firm's
chief executive officer for China, courted Chinese
government officials with the aid of prominent
personalities, including former US Treasury
secretary Robert Rubin and former president George
H W Bush. Bush even wrote a letter to the Chinese
Ministry of Foreign Affairs to seek official
support for the bid, claiming the deal "would be
conducive to the overall development of the
Sino-US relationship".
Interestingly,
following last week's announcement by the CBRC on
foreign investment caps, Guangdong vice governor
Zhong Yangsheng insisted that bids for stakes in
GDB were still open. Citigroup's main competitor,
another consortium led by the French bank Societe
Generale (SG) and including the Chinese steel
manufacturer Baosteel, had previously registered a
bid that did not exceed the existing investment
limits.
There were earlier reports that SG
had offered to pay for more than 80% of the
Chinese bank to counter the Citigroup proposal,
but SG remains in the race and is deemed to have a
better chance with the central government's
implicit objection to Citigroup's bid.
Citigroup has not commented on whether it
intends to walk away from the deal or lower its
bid. In response to questions of potentially
altered bids, SG stated that without a new request
for proposals (RFP) from Guangdong, Citigroup
could not resubmit a proposal for stakes in GDB.
At the moment, insiders are pessimistic
that Citigroup will prevail under the
circumstances, despite all its efforts.
Divisions at the top What are
the reasons for the stalled Citigroup bid?
Evidence points to multiple factors. Some
observers point to an apparent difference of
opinion between the central and local government
split over what to do with GDB. Provincial
authorities, stretched thin with budget worries,
prefer to let more experienced and
resource-endowed investors take over and plug the
losses GDB has been suffering.
However,
central regulators have had to consider the
broader implications of allowing an exception to
be made to the foreign investment caps rule. If
85% of GDB was signed over to the Citigroup
consortium, foreign investors which previously
acquired minority stakes in state banks would feel
entitled to negotiate similar terms, and bank
regulators can ill afford to accommodate this wave
of demands from foreigners.
In addition,
maintaining investor confidence is particularly
crucial at a time when China's two large state
banks, the Bank of China (BOC) and the Industrial
and Commercial Bank of China (ICBC) are planning
initial public offerings (IPOs) on overseas stock
markets. Even if Beijing agreed with the
logic behind selling off GDB, banking regulators
are less than thrilled with being cornered into
making a very public decision on privatization,
which has become an increasingly sensitive issue.
Ultimately, authorities were willing to overrule
even a powerful province like Guangdong in this
precedent-setting case.
Apparently, the
political environment for financial reform and
China's transition to a market economy has grown
unfavorable for Citigroup and other foreign banks.
Views regarding China's economic modernization
have experienced a discernible shift to the left
in the past few years, with opposition often made
on "nationalistic grounds".
Critics of
financial reform on the Chinese left (whose
nationalistic views, it should be noted, often
correspond to the "right" elsewhere) argue that
finance is a strategic sector which should not
fall into the hands of foreigners. They also have
objected to the listing of Chinese companies
abroad rather than at home, on the grounds that
this prevents ordinary Chinese investors from
owning stakes in their own companies.
The
ownership of significant bank stakes by foreigners
is depicted as a loss of "economic sovereignty",
which could result in an economy susceptible to
financial crisis should investors pull out at the
first sign of malaise, a scenario reminiscent of
the 1997-98 Asian financial crisis.
The
ideological split over the future of China's
transition to a market economy was further
highlighted when minutes from a high-level forum
convened by the China Society of Economic Reform,
a State Council run research institute, were
leaked to the Internet on March 4.
According to the New York Times, a website
operated by the Huayue Forum, known critics of
market-oriented reforms, was the first to post the
full minutes of the session. It remains unclear
how or by whom the minutes were leaked, but
according to the minutes, the meeting was attended
by top government leaders, including Prime
Minister Wen Jiabao, along with economic and legal
experts discussing the country's reforms and
development.
Candid discussion about the
lack of democracy, press freedom and misgivings
over the pace of economic modernization were
covered, but part of the transcripts described
protracted discussions about the role of foreign
investors in China's banking sector.
The
continued parlous state of certain government
banks, such as the Agricultural Bank of China, was
used to defend for the need for unrelenting
reform. Moreover, critics of bank divestments were
reminded that the government will continue to hold
two-thirds shares of three out of four state banks
for at least the next 10 years.
A major
trigger factor that heightened criticism against
banking authorities was the recent sale of 9% of
China Construction Bank (CCB) to Bank of America
(BOA) for 1.15 yuan (US$0.14) per share. BOA paid
what was perceived too little - 20% of the book
value of assets - in comparison to what it reaped
following the spike in valuations after CCB went
public. Critics charged that regulators gave
foreigners "too good a deal". As a result, other
bank stake sales negotiations have come under
increased scrutiny, with Citigroup being a notable
example.
President Hu Jintao has not made
any effort to overtly suppress these voices from
the left, but it is unclear whether this is
because he endorses their position or because the
balance of power within the Chinese leadership
prevents him from overruling them.
University of California San Diego
Professor Barry Naughton, a China expert, suggests
Hu is remaining cautious about expressing his
views and will continue to play factions off
against one another until he consolidates his own
position.
But reformers worry that his
inaction may increase the camp's influence and
hinder further financial reform. The head of the
Central bank, Zhou Xiaochuan, seen as the leader
of the pro-reform technocrats, has over time come
under political fire from the left for his
"progressive" views on financial reform, forcing
him closer to the party line.
With the
notable absence of Huang Ju, the vice premier in
charge of financial policy (considered to be
aligned with former president Jiang Zemin), due to
pancreatic cancer, Zhou and his fellow reformers,
which include CBRC head Liu Mingkang and Xie Ping,
head of the state-owned Central Huijin Investment
Co (an investment company which oversees major
Chinese banks), are missing a much needed
political boost.
When asked if and when
the government would reconsider changing
investment caps, Jiang Dingzhi, vice chairman of
the CBRC, said the agency would continue to "study
the issue", but suggested that any policy change
would not be in the near term.
Incidentally, the CBRC is set to release a
white paper on opening the banking industry, in
the second quarter. Vacillations in Chinese
banking policies are an accepted norm among
industry watchers because policymaking, while
conducted by technocrats, is also inevitably
subjected to politics. Whether a positive outcome
on foreign investment caps will emerge from the
white paper is anyone's guess.
The fierce
debate over China's transition to a market economy
continues, if mostly behind closed doors, and
serves as a reminder of how fractious politics can
interfere with economic reform. As for banking
reform, it may be another victim of shifting
factions within the top leadership.
Sue Anne Tay is a researcher
with Hills & Stern in Washington, DC, focusing
on Chinese politics, finance and economics. She
can be reached at satay@hillsandstern.com.
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