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A Citigroup Inc.-led consortium is expected within days to clinch a 24.1 billion renminbi ($3 billion) deal for a combined 85 percent stake in Guangzhou-based Guangdong Development Bank Co. Ltd., making the U.S. institution the first foreign bank to assume control of a Chinese lender with a national network. The substantial price the Citigroup consortium is willing to pay for a bank that is technically insolvent is likely to be sufficient to persuade China’s State Council, which is screening the transaction, to allow Citigroup the largest banking stake ever ceded to a foreign investor. The U.S. bank will reportedly take a controlling stake of between 40 percent and 45 percent; China’s long-standing foreign ownership limit is 20 percent per institution, or 25 percent if more than one foreign investor is involved. An agreement is expected within days and according to a source, the Chinese government is expected to inject fresh capital into GDB, as the Guangdong bank is known. He expects the transaction to close in the first quarter. The Citigroup consortium includes Washington-based Carlyle Group and several state-owned Chinese companies, including China National Cereals, Oils, and Foodstuffs Import & Export Corp. The imminent deal with Citigroup has fed expectations that existing foreign ownership restrictions will soon be relaxed as part of a World Trade Organization-inspired liberalization of China’s financial services sector. Elsewhere, HSBC Holdings plc is reportedly considering lifting its stake in Bank of Communications Co. Ltd. above 19.9 percent in anticipation of an easing of the restrictions. A flurry of Chinese media reports in the past few days said Citigroup trumped rival offers for GDB of Rmb22.6 billion and Rmb23.5 billion, respectively, from China’s second-largest insurer, Ping An Insurance Co. Ltd., and a consortium consisting of China’s largest oil company, China Petroleum & Chemical Corp. and France’s Soci�t� G�n�rale SA. Ping An’s foreign partner, ABN Amro Holding NV, dropped out of the race before the final bid, while another foreign contender, DBS Group Holdings Ltd., did not make it to the final round. Citigroup was able to assemble a final bid for GDB only after reaching an agreement with Shanghai Pudong Development Bank Co. Ltd. to end an exclusivity clause that would have barred Citigroup from investing in a rival Chinese bank. Citigroup has held 4.6 percent in Shanghai Pudong since 2003, and the agreement, which was announced Dec. 24, also included provision for the U.S. bank to raise its stake in the Shanghai regional bank to 19.9 percent. Foreign investors began to show interest in debt-laden GDB, whose adviser is Deutsche Bank AG, only after the Guangdong government pledged in the summer to pay a guaranteed amount for unexpected bad debts accumulated by the bank after June 2005, according to local press reports in Guangdong. These reports have suggested the sum could be as high as 60 percent of the total value of the new bad debts. When completed, Citigroup would become the first foreign bank to control a national Chinese bank. Its stake, however, while a controlling one, is expected to be slightly lower than the combined share held by its Chinese state-owned partners. GDB listed total assets of Rmb344.5 billion, a deposit balance of Rmb300.5 billion and loans of Rmb215.7 billion as of the end of 2004. It did not disclose bad debts, but Chinese media estimated these to be well over Rmb50 billion. While Citigroup would be the first bank to take control of a Chinese bank, it is not the first foreign company to do so. New York-based buyout firm Newbridge Capital LLC closed the purchase of a controlling 17.9 percent stake in Shenzhen Development Bank Co. Ltd., also a national lender, for $149 million almost a year ago. Copyright �2006 TDD, LLC. All rights reserved.

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