Citi owns a bit less than 4% of Shanghai Pudong. Bloomberg News reported this morning:

April 10 (Bloomberg) — Shanghai Pudong Development Bank Co., part-owned by Citigroup Inc., plans to raise as much as 30 billion yuan ($4.4 billion) selling shares and bonds to ensure it has enough capital to meet regulatory requirements.

The lender will raise as much as 15 billion yuan from a private placement, equivalent to as much as 20 percent of its existing shares, to 10 investors including the bank’s major shareholders, according to a filing today to Shanghai’s stock exchange. The statement didn’t say whether Citigroup will buy shares. The bank will also raise as much as 15 billion yuan issuing subordinated debt.

Hmmm….with 5.7 billion shares outstanding and a share price of 22 yuan, Shanghai Pudong has a US market cap of around $18 billion. Citicorp’s market cap is only $16.7 billion. Why shouldn’t the Chinese diversify some of their foreign exchange reserves into ownership of a major banking franchise? How about a reverse takeover by Pudong?

Well, there are some obvious reasons why not. The Chinese don’t know what’s inside Citigroup, don’t understand it, and don’t want the headache of owning a highly politicized piece of property with considerable exposure to Congressional sniping. The last thing Beijing wants is to sit in the cross-hairs while political snipers scream about selling the American economy out to foreigners. The last time someone from the region bought into Citi, moreover, it was the government of Singapore, which will get preferred shares exchanged into common equity at the equivalent of $3.25 a share. That position still is underwater.

But there is a case to be made for it, and if I were (still) an investment banker, here is what I would pitch to the Chinese authorities:

First, Citigroup’s structured portfolio of “toxic” assets is extremely cheap and manageable now that it doesn’t have to be marked to market. You own a bunch of this garbage anyway, and fund managers turn up on your doorstep daily to pitch distressed investing. You can do a whole lot better buying a distressed bank and leveraging a distressed asset play. Secondly, you can sell off most of Citi’s operations for a modest profit. America doesn’t need another branch bank after Wells Fargo/Wachovia, Chase/Washington Mutual, and Bank of America. Citi should get out of its consumer businesses and devolve into an international wholesale bank. Its main profits should be the runoff on its portfolio, which out to be worth a lot more than $3 a share. Third, by owning a major bank you get a seat at the table of corporate America. You get a peak inside the kimono at every American corporation and the inside track on future mergers and acquisitions. The business intelligence value of owning the franchise has to be worth a few billion dollars. That’s not counting Citi’s international branch network, which would give you the inside track on a dozen countries you don’t know much about. Presuming that the Obama administration throws its political shield over the deal and hails it as a great win for the American taxpayer (presuming you pay a bit more than $3.25 a share so that the Treasury can book a profit on its own 36% of Citigroup), it could be a very wise move. I wouldn’t underestimate the governance problems of running a monster like Citi — your managers will experience great frustration dealing — but at roughly $20 billion, you can afford the experience. After all, you have to learn to run great international finance franchises some time. Why not now?

At a market cap of $16.7, a smaller sovereign than China could afford to buy the joint.

As an aside: There are some very smart people at Citigroup. The franchise is worth a great deal. It took a century to assemble and couldn’t be easily reproduced. For example, in 2007 I spent a few days in Ecuador in my capacity as strategist for a hedge fund. The only major American bank active in the country was Citi, and the local office knew the economy and financial system cold. They gave me very good advice, and helped my fund make money trading Ecuadorian government debt. Citi has a global reach that no other US bank does.

As I’ve noted before by way of full disclosure: I own a bit of Citi preferred, bought at distressed levels, and I happily await conversion into common equity.

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