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### Viewing cable 07GUANGZHOU1267, Citigroup Turning Around Troubled Guangdong Development

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
07GUANGZHOU1267 | 2007-12-05 23:15 | 2011-08-23 00:00 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Consulate Guangzhou

`

    VZCZCXYZ0000
    RR RUEHWEB

    DE RUEHGZ #1267/01 3392315
    ZNR UUUUU ZZH
    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
    RUEAIIA/CIA WASHDC
    RUEKJCS/DIA WASHDC

` `

    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

    SIPDIS
    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

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