Citigroup gambling on China

Bob Moon Nov 16, 2006

KAI RYSSDAL: Here’s a deal that’s turning some heads. It’s a a stake in a major banking operation. Never mind a history of mismanagement and corruption. Not to mention a mountain of loans that might never be collected. None of that seemed to matter in the bidding for a 20 percent share of China’s Guangdong Development Bank.

Today, Citigroup agreed to pay more than $3 billion for the prize. China’s chaotic banking business is a big risk. But, Marketplace’s Bob Moon reports, the potential payoff dazzles the financial world.

BOB MOON: Buying a ticket to the vast Chinese marketplace isn’t cheap. But Citigroup, the biggest banking company in the U.S., is only the latest to decide it can’t afford not to.

Western banks see the big payoff in the huge untapped market for such services as credit cards, mortgages and car loans. But analysts say the banks will need to show China how to get its financial house in order. And today’s deal keeps much of the Guangdong bank in state control.

Citigroup executives seemed to suggest that today’s deal gives them effective management control. But Donald Straszheim at Roth Capital Partners remains skeptical:

DONALD STRASZHEIM:“The Chinese banking industry is what they would regard as strategically vital. They are not about to give up control over key decisions to some outside company.”

And even if Citigroup did succeed in buying management control of the bank, analyst William Gamble at Emerging Market Strategies still sees trouble:

WILLLIAM GAMBLE:“You’re trying to collect money from a state-owned company, you’re facing a judge that is employed by the same government that owns that state-owned company. You’re ability to make any headway is basically zip.”

Gamble believes Western banks will see their investments fail in a matter of years. But analyst Donald Straszheim says he understands why they think it’s worth the gamble:

STRASZHEIM:“To the extent that Citi or any other bank gets a real foothold in an economy that’s growing 10 percent a year – three times as fast as our economy, that expensive investment may, in fact, in the long run, turn out to be quite a good one.”

Stay tuned.

In Los Angeles, I’m Bob Moon for Marketplace.

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