china cautious over citigroup "investment"

106 years ago, citigroup was the first american bank to establish operations in china. today, citigroup continues to do business under various names including citifinancial and citibank, and has generally enjoyed a profitable existence in china.

fast forward a few years, citigroup's holdings in the united states (us), and by extension china, is experiencing financial turbulence. the crisis began after mortgage loans made to high risk borrowers with lower income, and/or lesser credit rankings, began to default on their mortgage loans. the high default rates were quite severe, rising 11% in ten years to 20% by 2006. this resulted in the bursting of the housing bubble in the united states. the situation is so dire that yesterday, the american federal reserve chairman ben bernanke threw his weight behind proposals for short term actions to stimulate economic growth to ward off an american election year recession.

due to the crisis, citigroup and other cash strapped american financial institutions have incurred major losses and have been wooing foreign investors to help them fill up their fund gaps and to expand business. citigroup in particular, has already secured 5 billon euros (7.5 us dollars) from the abu dhabi investment authority (adia). this cash infusion guaranteed adia a 4.9% stake in citigroup as of november 26, 2007. citigroup also planned to raise roughly 1.3 billion euros (2 billion american dollars) by selling a stake to china development bank (cdb). however, according to the wall street journal's web site, the chinese government is not too eager to see this deal through and the government has deemed the speculation on citigroup's part as 'a conjecture'.

cdb received a 13.6 billion euros (20 billion us dollar) cash infusion from china investment corp (cic) and is financially capable of paying the 1.3 billion euros for a stake in citigroup. moreover, china has been on a global acquisition frenzy lately, including a 3.4 billion euro (5 billion us dollars) investment in morgan stanley's equity units which are convertible into common shares. cic planned to invest 47.6 billion euros (70 billion us dollars) in overseas markets and still has a balance of about 40.8 billion euros (60 billion us dollars).

china must have a secret plan up her sleeve as she would rather forego an opportunity to own part of citigroup given the reasonable prices and the opportunity to purchase additional bargaining power when dealing with america on economic matters.