(Bloomberg, Nov 29, 2006) Not much has gone right in China for Citigroup Inc. since the world's biggest financial institution fired Margaret Ren, who probably earned the most for its Chinese bank since it opened in Shanghai more than a century ago.

The trouble started in 2004 after the 48-year-old Ren helped arrange China Life Insurance Co.'s $3.5 billion initial public offering -- netting Citigroup about $30 million in fees, a place among the top five underwriters in China's lucrative market for IPOs and a Securities and Exchange Commission investigation that would clear Ren and her staff of any wrongdoing, her lawyer says.

Citigroup, whose roots in China go back to 1902, has become an also-ran since Ren departed. Her successor as head of investment banking in China lasted less than 15 months and more than 75 percent of her staff bolted to competitors in what is emerging as the best place on the globe to sell new shares. Even with former U.S. Treasury Secretary Robert Rubin as chairman of the executive committee, Citigroup's rank in China equity sales slipped to 11th this year, while his former firm, Goldman Sachs Group Inc., led by his protege and current Treasury Secretary Henry Paulson, remains a perennial leader.

``Ren's departure meant Citigroup has had to start from scratch because investment banking is very much relationship- driven,'' said Liu Feng, an analyst at Hong Kong-based Guangdong Securities Ltd., who tracks the industry. ``They face an uphill battle to turn around the situation because it's really difficult to hire experienced bankers in China, where every company is scrambling for talented people.''

Political Connections

Ren is the daughter-in-law of former Chinese Premier Zhao Ziyang, who died last year. She received a master's degree in management from the Massachusetts Institute of Technology in Cambridge, Massachusetts, and joined Citigroup's Asia headquarters in Hong Kong after stints at New York-based Bear Stearns Cos. and now-defunct Kidder, Peabody & Co.

She would comment only through her lawyer, Mark Hulkower of Washington-based Steptoe & Johnson LLP. SEC spokesman John Heine declined to comment from his Washington office about the investigation of Citigroup's share sales. Citigroup spokesman Richard Tesvich in Hong Kong declined to comment on Ren's departure or the SEC investigation.

Rebuilding Team

Following Ren's ouster in June two years ago, 10 of Citigroup's 13-person investment banking group dedicated to China left the New York-based company. Citigroup will arrange only one IPO this year, earning about $20 million in fees, while rivals led by Zurich-based UBS AG and New York-based Goldman Sachs shared about $1.2 billion from record IPOs by Chinese companies, data compiled by Bloomberg show.

IPOs by Chinese companies reached $50.5 billion this year, representing 24 percent of the global total, according to Bloomberg data. Last year, China accounted for 13 percent of the worldwide tally.

Citigroup now has a China team of 24 that will continue expanding, said Mark Renton, 46, the company's Hong Kong-based head of investment banking for the Asia-Pacific region, in a Nov. 22 telephone interview.

``The challenges in China are to obviously attract and retain the best people,'' Renton said. ``We took a broad view of the marketplace and concluded the era of relying on a single rainmaker banker was over. What's more appropriate is to build a team of professionals.''

Slide in Ranking

The approach may be starting to pay dividends. Citigroup was invited last week to pitch for the IPO of Bank of Beijing, with firms including Goldman Sachs, Morgan Stanley and Merrill Lynch & Co., bankers involved in the bidding said. In June, Citigroup was hired to underwrite a sale next year by China Citic Bank along with four other arrangers.

Still, Citigroup was left out of the competition for an initial share sale by China Pacific Insurance (Group), China's third-largest life insurer, bankers involved said.

While Citigroup was among the top five global equity underwriters for the past eight years, the company has achieved that stature only once in China. That's when Ren helped the bank land China Life Insurance's IPO in 2003 and Citigroup was the fourth most active underwriter in the fastest growing of the world's 20 biggest economies that year, Bloomberg data show.

Loss for Franchise

Citigroup's current slide from seventh in 2005 is the result of its lone IPO assignment this year: next month's sale of about $1.5 billion of stock for China Coal Energy Co., the nation's second-biggest coal producer, bankers involved in the offering said. Fees will be shared with Beijing-based China International Capital Corp. and New York-based Morgan Stanley, the second-largest U.S. securities firm by market value after Goldman.

Citigroup has been involved in underwriting so-called secondary share sales this year for companies including Focus Media Holding Ltd., China's biggest publicly traded advertising company, and Actions Semiconductor Co., the Guangdong-based maker of computer chips for portable electronic equipment.

``Ren's departure can be viewed as a setback for Citigroup and a loss for its franchise,'' said Dale Colling, chief executive officer of Shanghai-based ALC Capital, which advises and invests in Chinese companies. ``She is well known and quite effective at dealing with high-ranking Chinese. Still, Citigroup can expected to be a player in this field in the future and it would be a mistake to count them out.''

Missing Deals

Her career at Citigroup ended during a U.S. probe into how shares were allocated in the China Life Insurance offering, according to a nine-page document from the SEC. Regulators also wanted to know about payments and gifts to politically connected individuals and the circumstances in which Citigroup won the underwriting assignment for China Construction Bank Corp., whose then chairman, Zhang Enzhao, was this month jailed for 15 years for taking bribes in an unrelated case.

Ren, who's married and has two children, now spends most of her time in Beijing. While she occasionally provides advice to Chinese companies, she is still unemployed.

Within a year of Ren's departure, Beijing-based China Construction Bank, the country's fourth-biggest bank, dropped Citigroup as a banker for its $9.2 billion IPO, an assignment she helped win. Zurich-based Credit Suisse Group replaced Citigroup after the U.S. company refused to invest in the Chinese bank, bankers with knowledge of the deal said.

And when nine investment banks bid for a role in Industrial & Commercial Bank of China Ltd.'s record $22 billion IPO, Citigroup wasn't among them.

Earnings From China

Citigroup entered China 104 years ago when it became the first U.S. bank to open a branch in Shanghai. Today more than 7,000 people are employed by the bank in China, including about 4,000 in Hong Kong and the rest in nine cities on the mainland.

The company generates as much as 3 percent of its revenue from China, estimates Joseph Dickerson, a London-based analyst at Atlantic Equities LLP who has a ``neutral'' rating on Citigroup shares. Citigroup had total revenue of $83.6 billion last year and $19.8 billion in profit from continuing operations.

``China is an important market for any investment bank wanting a global presence,'' said Simon Clinch, who helps oversee about $4 billion at London-based F&C Asset Management and holds shares of Citigroup. ``The opportunities in the long run are quite substantial.''

CEO Charles Prince said in an Oct. 19 conference call with analysts after Citigroup reported third-quarter earnings that he wants to increase the company's share of profits from outside the U.S. to 60 percent from about 40 percent.

Guangdong Purchase

Citigroup has trailed Bank of America Corp. of Charlotte, North Carolina, and London-based HSBC Holdings Plc in investing in Chinese banks. During the past year, Bank of America's shares appreciated 16 percent, bringing its market valuation to within $3 billion of Citigroup. Shares of Citigroup fell 34 cents today to $49.55 and Bank of America rose 18 cents to $54.10 in New York Stock Exchange composite trading at 12:40 p.m.

Citigroup signed a $3.1 billion agreement on Nov. 16 to take control of state-owned Guangdong Development Bank, becoming the first overseas financial-services company to manage a Chinese bank. The Guangdong deal will give Citigroup access to 500 banking outlets in a market where annual loan growth averaged 14.5 percent from 2000 to 2005.

``It's going to be one of the fastest-growing banking markets, but the others such as Bank of America are ahead of Citigroup there,'' said Dale Robertson, who helps manage almost $2 billion at Edinburgh Partners, which holds shares of Bank of America and doesn't own Citigroup.

Cnooc's IPO

In investment banking, Citigroup is lagging behind Goldman, whose former chairman and CEO, Paulson, made more than 70 visits to China in the rush for new business with companies including Bank of China Ltd. and ICBC. Goldman is the second-ranked underwriter of overseas stock sales by Chinese companies this year after UBS, Bloomberg data show.

Paulson, 60, now is trying to persuade the Chinese government to open its markets further like the 68-year-old Rubin, his former boss at Goldman, who was co-chairman of the firm before joining the Clinton administration in 1993.

Citigroup hired Francis Leung, 52, as Asia chairman in May 2001 to help cover senior clients in China. Ren was recruited from Bear Stearns three months later as head of the China investment banking division.

The bank was attempting to rebound from its handling of the aborted IPO for Cnooc Ltd., the first of three big state-owned oil companies that the government wanted to take public in 1999. The sale was scrapped after Citigroup first tried to cut its size. Citigroup ``failed to judge the market correctly,'' Wei Liucheng, Cnooc's former president, said at the time.

Share Sale Document

For the next two years, as Chinese companies raised $21 billion in Hong Kong IPOs, Citigroup failed to win any of the deals. That changed in early 2003 when Ren helped win the China Life Insurance sale, which took place in December of that year. In January 2004, Citigroup landed the assignment for China Netcom Group Corp. (Hong Kong)'s $1.3 billion IPO.

Ren recruited Chen Rui, a daughter of PetroChina Co. Chairman Chen Geng, and Hua Qin, a daughter of Hua Jianmin, a member of China's Cabinet who's overseeing the reorganization of China's four biggest banks. Chen and Hua were among the 10 bankers in Ren's group who left Citigroup in the past two years.

Shanghai Sail Technology Holding, an affiliate of Shanghai- based Sail run by Jiang Mianheng, a son of former Chinese President Jiang Zemin, was allocated $14.9 million of China Life shares in December 2003, according to a document dated Dec. 15, 2003, that was sent to the underwriters by China Life, a copy of which was given to Bloomberg News.

Legal Woes

While the shares were distributed, Citigroup was competing to arrange Construction Bank's IPO. The bank's former chairman, Zhang, had asked Citigroup to lobby Jiang Mianheng, his key political supporter, before he could award the IPO to Citigroup, according to a Citigroup internal document dated May 2003.

The SEC inquiry surfaced during a period when Citigroup's Prince was trying to resolve several lawsuits, including a $2.65 billion claim brought by WorldCom Inc. investors.

``They had a lot of trouble at the time and they had to be overly diligent,'' said Glenn Henricksen, a former risk manager at Bear Stearns in Asia. Henricksen and Ren both worked at Bear Stearns in the late 1990s.

Ren was a managing director in investment banking at Bear Stearns and she focused on China, where she was born. She helped Bear Stearns arrange a $2 billion share sale by China Telecom (Hong Kong) Ltd. in 1999, the biggest Chinese equity underwriting assignment won by the firm.

New Hires

The SEC completed its inquiry this year and cleared Citigroup and Ren of any wrongdoing, said Hulkower, Ren's lawyer.

Ren was replaced as head of China investment banking by Wei Christianson, 50, in October 2004. Christianson left Citigroup for Morgan Stanley in January. Leung, who advised China National Petroleum Corp., the nation's biggest oil company, and PetroChina Co., the country's largest oil producer, on acquisitions during the past year, resigned in July.

Citigroup in March hired Zhao Jing from Morgan Stanley and Albert Ng from PricewaterhouseCoopers LLP as managing directors in investment banking. Two months later, the firm hired Wu Sheng and Ji Yehong from Morgan Stanley for its China investment banking team.

``We believe we have the best platform in China and what you will see us continue to do is attract the best people to the firm,'' Renton said. ``We have already hired some excellent people.''

Source:Bloomberg