What are the benefits from "Bank Rush"?

BEIJING (AFX) - A consortium led by Citigroup has been named the preferred bidder for Guangdong Development Bank after doubling its offer to nearly three bln usd, the Financial Times reported.

The Citigroup-led consortium is understood to have won rights to hold exclusive talks with the state-owned bank for one month, the newspaper said.

The consortium has raised 24.1 bln yuan for an 85 pct stake in the bank, which would make it the first foreign-led group to own a mainland Chinese bank.

The offer trumped that of rival bids by France's Societe Generale and China's Ping An Insurance, the newspaper said.

Citigroup and Guangdong Development Bank declined to comment, the newspaper said.

The deal between the two is expected to close in the first quarter this year.

Citing people close to the deal, the newspaper said Citigroup would be paying more than twice Guangdong Development Bank's book value for a stake of less than 50 pct, while its local partners, including China National Cereals, Oils & Foodstuffs, would own the remainder.

The deal will need approval from Beijing as foreign banks are not allowed to own more than 20 pct of a Chinese lender, or 25 pct jointly, the newspaper added.

During the business mandarin session yesterday discussing the article about the above news in "Caijing" (Finance Review) magazine, I asked "why are these organizations fighting for a bank that is at the edge of bankruptcy? What are the benefits they can get from the deal?"

My banking guru mandarin student answered my question as follows:

These organizations are fighting for a reserve for their future business opportunity in China. With the entrance of one of the Chinese banks now, the foreign banks would take the opportunity to put their feet down in China and wait for opportunities to promote their business in China whenever possible. Buying shares is their first step - paying for the ticket to China.

There are successful cases in Japan - some government owned banks nearly went bankrupt, but the government sold them to some foreign organizations - after 8 or 10 years, the foreign organization sold the bank and made 10 times profit.

As Citigroup has doubled its initial offer to Guangdong Development Bank, it is obvious that Citigroup doesn't care about the cost of the transaction; it is the success in this competition that counts. They obviously have made up their mind to get something in this "bank rush" in China just as many other foreign banks are trying to do. Again with HSBC's wide-spread business in China, Citigroup doesn't want to be left behind in this lucrative land.