China used its regulatory powers to scour the books of Citibank Shanghai in a hostile and extraordinarily intrusive 2007 audit that appeared primarily aimed at controlling Citi's growth and uncovering its secrets to success, the bank's top China executive at the time told U.S. officials.

The charges were contained in the cache of 250,000 U.S. diplomatic cables obtained by the anti-secrecy group WikiLeaks that Reuters has reviewed.

The Citi case underscores the high level of scrutiny that foreign companies face in China, particularly in the financial sector, and it provides a window into complaints from U.S. companies and trade negotiators that China conducts intellectual property theft and forced technology transfers.

The China Banking Regulatory Commission (CBRC) sent 40 auditors into Citi in 2007 and wants to know how Citi works so that the CBRC can control us due to their fear that Citi will become too strong, the bank's then country head Richard Stanley was quoted as saying in a classified cable from the U.S. Shanghai consulate.

There was knowledge transfer happening as a result of the audit, according to Stanley in the December 11, 2007, cable.

While visits by government officials to foreign-owned businesses in China are fairly common, the kind of office sweep of a large Western corporation that Stanley describes is a rarity.

China keeps a tight grip on foreign investment in its financial sector, using capital controls to stem outside money entering the country and strictly limiting the amount a foreign company can invest in a finance-related domestic firm. Getting regulatory approval for such investments can take at least a year.

Citigroup Inc. is one of the largest foreign lenders in China, with a presence dating back to 1902. It now has about 34 consumer banking outlets there stretching across the country. It was one of the first foreign lenders in 2007 to incorporate locally, a move that allowed Chinese regulators to scrutinize its books so thoroughly.

Stanley, a U.S. citizen who has since died, was both Chief Executive Officer of Citi China and Chairman of Citibank (China) Co., Ltd, the locally-incorporated subsidiary.

Just six months after Citi launched the subsidiary, Chinese regulators sent 40 auditors into Citi's Shanghai headquarters for a month, Stanley was quoted as saying in the 2007 cable.

Stanley discussed the Chinese audit in two separate meetings with the then-U.S. special envoy at Treasury for China, Alan Holmer, as well as Federal Reserve System Governor Kevin Warsh in November, 2007, the U.S. cable said. Officials from the Shanghai consulate and Beijing embassy were also present, it said.

The State Department declined to comment on any classified cable, its spokesman P.J. Crowley said.

A spokeswoman for Citigroup declined to comment directly on the 2007 events described in the cable but said the bank had good ties with Chinese regulators.

Although we are unable to respond directly to these dated and second-hand comments attributed to a deceased Citi executive, the alleged statements in no way reflect Citigroup's view of its regulatory relationships in China. We have a constructive relationship with our regulators in China, the spokeswoman said.


In the cable, Stanley is quoted as saying he felt the audit was motivated more from an attempt to see how Citi works than to see if Citi was doing anything improper.

Also, it said Stanley believed the Chinese regulator was deadly serious about checking Citibank (China)'s independence from international Citi business and making it look and act more like a Chinese bank.

A recurring question asked by the Chinese auditors was: Why don't you have more Chinese people on your bank board? Stanley told the Americans.

He saw the audit as a sign that the Chinese were feeling more nationalistic and confident. Chinese officials were becoming strident and arrogant, and Stanley got the message from them that Chinese banks were not ready to have significant foreign bank participation, the cable said.

We are not in an opening-up period in terms of China's financial sector, Stanley told U.S. officials in the 2007 meetings. He implied things had been better from 1998-2003, saying, I'm waiting for the second coming of Zhu Rongji, China's former premier.

The current premier, Wen Jiabao, had a muddled approach, Stanley was quoted as saying.

But Stanley saw hope in what was then a recent decision to appoint the former Shanghai Communist Party Secretary Xi Jinping to the Politburo, the cable said. Stanley said Xi was a very impressive person with a pro-business background.

Xi, now China's vice president, is the presumed successor to China's President Hu Jintao in an arranged power handover that begins in late 2012.

The cable was sent to officials in the U.S. State and Treasury Departments as well as the National Security Council.

Stanley left Citi in 2008 to become CEO of DBS Group, Southeast Asia's biggest lender. He died of complications from leukemia in 2009.