Citigroup's bid to buy a stake on China's Guangdong Development Bank is hanging in the balance as China appears unlikely to permit foreign investors to buy controlling stakes in its small and medium-sized banks.

A source close to the banking regulator said China was unlikely to loosen its control of the banking sector which currently restricts foreign investment to a maximum of 25 percent equity and individual investors capped at 20 percent.

"The case of Guangdong Development Bank has been looked into many times by the China Banking Regulatory Commission (CBRC) and other related administrations and it's hard to break the present restrictions on foreign strategic investor issues," CBRC said in a letter to the Guangdong Municipal Government.

The Guangdong Development Bank has 26 branches in south China's Guangdong Province and is heavily in debt.

The bank's situation is believed to have prompted its owner, the provincial government, to support the foreign investment limit being waived for this deal but top-level approval is also needed and it seems the central government is not willing to break the current rules.

Citigroup's spokeswoman in Shanghai, Marine Mao, said the bank had no comment. The world's leading bank and its local partners bid US$3 billion for an 85 percent stake in the Guangdong Development Bank in December.

An offer made by competitors, France's Societe Generale and China's Ping An Insurance (Group) Co, was less.

Earlier the Shanghai based, China Securities News, reported that Jiang Dingzhi, vice-president of CBRC said at the Boao Forum that CBRC had no plans to adjust the restrictions on foreigners' equity holding in the bank sector and wouldn't be changing the policy in the near future.

"The Guangdong Development Bank restructuring solution is being studied," the paper quoted Jiang as saying.

China has introduced foreign strategic investors to its banking sector as it believes their technological expertise and corporate governance standards are as important as the cash they bring to the banks.

China Construction Bank launched a US$9.2 billion IPO in Hong Kong last October and the Bank of China is believed to be planning to raise about US$8 billion in a Hong Kong IPO in May.

The Industrial and Commercial Bank of China, the country's largest lender, hopes to follow by the end of the year with an IPO that bankers say could raise US$10 billion or more.

All three lenders have sold shares prior to their listings to foreign strategic investors to access their expertise.

However, criticism has mounted, with some saying China is selling stakes in the country's banks too cheaply and counting too much on foreigners.

Following the criticism, Premier Wen Jiabao, said on March 14 that the Chinese Government had to keep control of state-owned banks to minimize the risk of losses while financial systems were being reformed.

If Citigroup is successful with the bid it would become the first overseas investor to buy control of a state-owned bank in China.

(China Daily April 25, 2006)