Bank battle in Beijing

As a Citigroup-led consortium bids for an 85% stake in Guangdong Development Bank, China’s foreign ownership rules come under pressure. Andy Thomson reports.

Citigroup: throwing down the gauntlet

It would surely be fanciful to imagine that the opening up of China’s economy since the late 1970s has been a seamless process. It’s safer to assume that in the ensuing years countless arguments have raged behind the closed doors of various government departments – with some protagonists keen to open the floodgates to foreign competition and influence while others seek primarily to protect the domestic workforce and preclude the possibility of civil unrest.

It is increasingly apparent that just such an intense debate is currently underway in Beijing. At present, the rules state that an individual foreign entity is allowed to acquire a maximum 20 percent stake in a Chinese commercial bank, while the limit for a foreign-led consortium is 25 percent.

These rules are being challenged head-on by financial services giant Citigroup, which is leading a consortium including Washington DC-based private equity firm Carlyle Group that has submitted an offer to acquire 85 percent of Guangdong Development Bank for around $3 billion (€2.5 billion). Citigroup is understood to be seeking an interest of between 40-45 percent in the bank.

The gauntlet has been laid down in stark terms: effectively either Citigroup’s bid falls, or one of China’s most significant foreign ownership rules is made redundant. Supporters of both sides have taken up their battle positions.

One side is represented by the likes of Yu Yunhui and Luo Deming of the Bank of Shanghai, who were quoted in an article in Shanghai Securities News in October last year saying the following: “The excess introduction of foreign capital into our financial institutions will easily lead to a loss of control over our economy and threaten national financial security. We must abandon policies that are making China’s economy a colony, like Latin America.” The statement coincided with accusations that the government sold off stakes in Bank of China and China Construction Bank too cheaply.    

The other side is led by a group of reformers headed by People’s Bank of China governor Zhou Xiaochuan, a rising political star tipped to become Vice Premier after a government reshuffle touted for 2007 or 2008. Zhou is noted for his aggressive support of foreign investment to speed up the pace of economic reform.

So which side is likely to emerge triumphant? At the moment, the clever money seems to be on the reformers, who are believed to have the support of both the Guangdong provincial government and the banking regulator in Beijing. Some say the decisive factor is that Guangdong Development Bank is relatively small (the country’s 12th largest lender) and under-performing. There are whispers that the government has decided to protect only the country’s “big four” lenders from foreign control.

Should the decision unexpectedly go the other way, a consortium led by French bank Societe Generale is waiting in the wings, having submitted an offer worth less than Citigroup’s but which does not flout the current ownership rules (though reports suggest that if permission is given to Citigroup to press ahead, SocGen has expressed a wish to make a counter-offer that would also seek a controlling stake).

Whatever the outcome, the banking sector finds itself centre stage as China is forced to decide whether economic liberalisation can take one small step further forward.