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Your message - an idea whose time has arrived

By William PesekBloomberg News
Published April 5, 2007


Charles Prince's visit to China last week came not a moment too soon, just as a largely state-owned Chinese bank made headway toward surpassing Citigroup Inc.

That humiliation briefly befell Bank of America Corp. last week, when its market value was exceeded by Industrial & Commercial Bank of China Ltd., which few investors had probably heard of a year ago.

By the end of Asian trading on Friday, the Beijing bank was back to No. 3 with a stock valuation of $225-billion, compared with Citigroup's $252-billion and Bank of America's $229-billion. Yet given the mania surrounding China, how long will it be before Bank of America and then Citigroup are bested by ICBC? Two years? Two months? Sooner?

Maybe Prince is missing the plot here. Perhaps Citigroup should do a share sale in China. Why not sell shares in an entity called CitiChina Inc.? Or even better: That way, he would combine China and the Internet, the global economy's biggest sales tools.

Like adding ".com" at the end of a company's name in the late 1990s, China has become an economic equivalent of sex - it sells. If you want media buzz and investors lining up for a prospectus, toss "China" into the name.

All of this is a bit tongue-in-cheek. It's fun to muse about, but highly unlikely. It still gets at a serious point: The gold-rush mentality over Chinese bank shares may prove even more irrational than the one in U.S. technology stocks in 1999.

Klaus Kaldemorgen, head of Deutsche Bank AG's DWS mutual-fund unit, which manages the equivalent of $338-billion, put it well last month: "I like Chinese companies, but the valuations in the financial sector are just ridiculous and incredibly inflated."

One wonders whether investors should consider China a good place to raise capital at the moment. So-called pyramid schemes usually work out for those who get in early. Those who join later often experience big losses and realize the folly of such an idea - in Asia or elsewhere.

Citigroup is focusing more and more on Asia. Prince may add more than 10,000 employees in the region through acquisitions even though he aims to reduce annual expenses by at least $1-billion.

He plans to buy Bank of Overseas Chinese in Taiwan and Tokyo brokerage Nikko Cordial.

It's a smart move. Citigroup generates about 20 percent of its profit from Asia, compared with 41 percent at HSBC Holdings PLC of London. Expanding in Asia is a no-brainer at a time when Prince wants more than 60 percent of earnings to come from outside the United States, up from 45 percent last year.

Even with the many risks to China's outlook, 10 percent growth and at least $2-trillion of household savings are forcing international banks such as Citigroup to rush into Asia's No. 2 economy.

The idea is that if you are going to bet on China's boom, banks are the place to be.

[Last modified April 4, 2007, 23:30:35]

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