Shenzhen Development Bank Forging New Territory with

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TAGS: EFIN ECON CH
SUBJECT: Shenzhen Development Bank Forging New Territory with
Chinese Regulators

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1. (SBU) Summary: Shenzhen Development Bank (SDB),the first company
to list publicly in China, is working closely with Chinese
regulators to clarify untested regulations governing China's
financial system especially as they relate to proprietary
information, according to the bank's American chairman. He
described a positive relationship with regulators and expressed
satisfaction in helping raise professional standards of bank staff,
but expects tight controls on lending to continue next year. End
summary.

Breaking New Ground in Regulatory System
--------------


2. (SBU) SDB has had to work closely with Chinese securities and
banking regulators to clarify untested regulations in China's
financial system, according to SDB Chairman and CEO Frank Newman.
Newman told us December 18 that on several occasions bank executives
have had to repeatedly question instructions from regulators to
determine exactly what was required under Chinese regulations. For
example, Chinese Securities Regulatory Commission (CSRC) officials
notified the bank that, according to Chinese regulations, it would
have to publicize all resolutions reached at board meetings
immediately after the decisions were made. SDB executives raised
concerns about releasing proprietary information that could give
competitors an advantage. After several discussions with
regulators, the two sides agreed that SDB could fulfill its
obligations by publishing a summary of board resolutions. Newman
said that SDB was currently engaged in a similar process with CSRC
over the legality of board director elections after one of the
board's independent supervisors had been disqualified by CSRC.
Christina Bao, Newman's special assistant, noted that because SDB
was the first company in China to list publicly (its ticker code is
000001),it had often been the first to test securities regulations.



3. (SBU) Newman explained that several discussions on the limits of
Chinese regulations had revolved around the meaning of the word
"advice." On more than one occasion, regulators offered SDB
"advice" on its operations when the "advice" was really intended as
a requirement. Newman first had to clarify the regulators' intent
and then sometimes questioned the regulatory basis for the
requirement.

Shared Goal of Success
--------------


3. (SBU) Despite this series of discussions with regulators, Newman
described SDB's relationship with them as positive overall. Newman
said that CSRC and the Chinese Banking Regulatory Commission (CBRC)
were both supportive of Newbridge Capital's equity stake in SDB and
wanted the foreign investment venture to succeed. He acknowledged
that Newbridge is not in the banking business for the long haul. It
will sell its stake in SDB once the value of its investment has
risen enough. However, he emphasized that Newbridge's strategy was
not to buy companies and flip them for a quick profit and the firm
wanted to avoid that kind of reputation. Instead, Newbridge plans
to add substantial value to SDB before divesting its stake.

Anticipating Tighter Controls
--------------


4. (SBU) When asked about recent controls on bank lending, He
Zhijiang, SDB's Treasurer, affirmed that they were currently very
tight. He complained of the difficulty banks face in turning a
profit with such limited ability to issue loans. Newman commented
that he expected CBRC to give SDB a specific lending cap for 2008.
He noted that in a conversation in Beijing, senior banking officials
had expressed frustration with the limited range of tools at their
disposal for controlling monetary expansion. They told him they
would prefer to use open market operations or other more
sophisticated tools but lacked such options for now.

IPO Problems
--------------


5. (SBU) Newman also complained about the effect of initial public
offerings (IPOs) on China's financial sector. He explained that
every time there's a major IPO, SDB depositors withdraw large
amounts of funds and transfer them to the four major banks that

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handle IPOs in hopes of being able to purchase the undervalued
shares. He said the total value of the withdrawals from SDB can
reach RMB 15 billion (US$2 billion) for high-profile IPOs -- much of
which returns back to SDB after the IPO. He also criticized the
lottery-like impact of IPOs on income distribution in China, noting
that they reward the well connected and the lucky. He also pointed
out the much of the same criticism could be made of IPOs in the
United States.

Lessons Learned After 2 1/2 Years
--------------


6. (SBU) Looking back on the accomplishments of his first two and a
half years as Chairman of SDB, Newman underscored raising the
professional standards of the bank's staff. In particular, he noted
a standardized code of conduct that was issued to all bank employees
on his instructions. Senior banking regulators have held it up as
an example for banks all over China, according to Newman. He also
pointed to successful efforts to establish central financial control
over bank branches, explaining that without such controls a single
bad branch manager can bring down the whole bank.

Newbridge and Newman - Background and Bio
--------------


7. (U) Newbridge purchased an 18-percent stake in SDB in 2004 for
approximately US$150 million. It controls four seats on the
17-member board. Bao Steel bought a 5.4 percent stake in SDB for
US$571 million in December 2007 to become the second largest
shareholder, controlling one board seat. As of September 30, 2007,
SDB held deposits totaling RMB 288 billion (about US$3.8 billion)
and had a non-performing loan ratio of 6.41 percent, down from 7.98
percent at the start of 2007. The bank earned a net profit of RMB
1.87 billion (US$250 million) during the first nine months of the
year, up 110 percent from the same period a year earlier.


8. (U) Frank Newman joined Shenzhen Development Bank as chairman and
CEO in June 2005. His banking career began at Citigroup in 1969 and
included positions at Wells Fargo and Bank of America before Newman
joined the U.S. Department of the Treasury in 1993. He served first
as Under Secretary for Domestic Finance and then as Deputy Secretary
from 1994 to 1995. Subsequently, he became Senior Vice Chairman and
then President and CEO of Bankers Trust until 1999.

GOLDBERG