NEW YORK -- Cash-strapped international banks are showing a lot less interest in increasing their investments in the Chinese banking sector than they were before the global credit crisis took its toll, Chinese banking sources said on Tuesday.
It isn't that they've gone cold on China, but the combination of high valuations for Chinese banks and the global banks' crippled balance sheets due to growing write-downs of bad debts have made expensive overseas investments much less attractive, the sources said.
"Before we talked to big banks like Citigroup and HSBC, we thought they may have insisted on bigger ownership or even a controlling stake in their Chinese partners," said a Chinese regulatory source.
"But our communications with these foreign banks tell us a different story," the source said.
Beijing is reviewing foreign investments in China's banking sector which may result in some policy changes later this year, including allowing the percentage of foreign ownership in Chinese banks to increase, according to industry watchers.
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The United States and the European Union have been pressing Beijing since it joined the World Trade Organization in 2001 to raise investment caps which restrict a single foreign bank to owning 20 percent of a Chinese lender. Cumulative foreign investment is limited to 25 percent.
As part of their review, Beijing bank regulators have been in close contact with more than a dozen major foreign banks in China, including Citigroup Inc and HSBC Holdings Plc , and found that most overseas lenders feel "generally satisfied" with current Chinese banking regulations, according to people with direct knowledge of the matter.
Foreign banks in China are more concerned about transparency of supervision and the efficiency and standards of local banking watchdogs across the country, they said.
INCREASE STAKES
If Beijing does loosen foreign ownership restrictions, some foreign banks, including Citigroup and HSBC, have been given options to increase the stakes in their partners.
For instance, HSBC has the option to increase its stake in Shanghai-based Bank of Communications to 40 percent, which would make HSBC the controlling shareholder of the Chinese bank.
HSBC owns nearly 20 percent of Bank of Communications, whose top shareholder is China's Ministry of Finance, with a 26 percent stake.
Citigroup's China banking partners include Shanghai Pudong Development Bank, in which the top U.S. bank by assets has a nearly 4 percent stake, and Guangdong Development Bank, with roughly 20 percent.
Citigroup executives have said Citi wants to increase its stake in Shanghai Pudong Development Bank to 20 percent. However, the two parties have been stuck in negotiations for more than a year as they haggle over the price.
Citigroup bought a nearly 5 percent share of Shanghai Pudong Development Bank for just $72 million in January 2003. Shanghai Pudong Development Bank chairman Ji Xiaohui told Reuters last month that Citigroup would have to use Pudong Bank's Shanghai-listed share price of about 35 yuan (about $5) as a reference for any share purchase.
"That's just one thing," said a second source briefed on the situation. "The other thing is that foreign banks in China want to make sure whether a bigger stake in their partnerships can guarantee a better relationship."
The source acknowledged that price had become a major concern, which led foreign banks in China to be more hesitant when considering a stake increase.
Some Chinese banks have said they will not let foreign shareholders have stakes that are too big, in part because Chinese executives want to retain their control of the management as well as to continue to take advantage of foreign expertise through the partnership.
Major western banks have written down tens of billions of dollars of losses due to subprime mortgage-related business and some of them are considering selling off their holdings in Chinese banks for cash to support their core business.
The China Banking Regulatory Commission, the industry watchdog, is expected to submit its initial report containing foreign banks' responses to its survey to the State Council, China's cabinet, before the end of March, the sources said.
A final report, including decisions from top leaders in Beijing on whether to raise foreign ownership caps or not, is expected to be released at the end of this year or in early 2009, later than expected due to Beijing's caution on policy relaxation.
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