With the clock ticking on the deregulation of China's financial markets, Citigroup Inc. is getting ready to pounce.
Six months ago the conglomerate and some of its biggest foreign competitors won the right to offer foreign currency transaction services to Chinese individuals and corporations. And Citi is said to be mulling a 10% stake in a Chinese development bank that would give it access to more branches through which to conduct this business as well as distribute more products in the market, including credit cards.
Still, the company's ability to build its business in the People's Republic hinges on financial reform there, and the going is slow. Citi has done business in China since 1902 but has barely established a toehold, because the government has always curtailed the activities of foreign banks.
Citi and other U.S. companies began a genuine push in China a decade ago, but the big opportunity is still four years away: By 2006 China must honor its commitment as a new member of the World Trade Organization by fully opening its markets to foreign financial organizations.
The barriers will gradually come down before then, however. China is already encouraging foreign banks to take small equity stakes in its banks, arrangements that would help the local banks clean up bad loan portfolios and get access to new and better operating technology while giving the foreign companies a platform and a relationship that can turn into an eventual acquisition.
Citi's expansion strategy remains murky, perhaps because the market itself is in such a state of flux. "China is one of our key strategic priorities," said Richard Stanley, the corporate country officer in China. "The timeframe depends on the pace of deregulation," and "we are in constant dialogue with the regulatory authorities."
In 1993 Citi became the first international bank to move its headquarters from Hong Kong to Shanghai. It now has six branches in Beijing, Shanghai Pudong, Guangzhou, and Shenzhen, including a sub-branch in Shanghai Puxi; two representative offices, in Xiamen and Chengdu; and 400 employees on the ground in China.
In March Citi won the right to conduct foreign currency transaction services for local Chinese individuals and corporate customers at its Shanghai branch, though it still cannot conduct currency services for clients in yuan.
Citi had already been offering banking services to non-Chinese multinational corporations, foreign-invested enterprises, and financial institutions in the form of foreign-currency-denominated loans, cash management, trade finance, foreign exchange, derivatives, and project finance.
The company has been saying for much of the past decade that it intended to build its operations in China. Executives say deregulation will open all sorts of doors, including the chance to offer Citi's array of consumer loan, deposit, investment, and insurance products.
"If there is any U.S. bank capable of expanding globally, profitably, it's Citi," said Andrew Collins, a bank analyst at U.S. Bancorp Piper Jaffray. Two potential risks, he said, are out of Citi's control - how China rewrites bankruptcy laws and reforms its tort system. Those issues could delay the expansion of some Citi consumer operations.
Citi is in a race with U.S. and European players.
HSBC Holdings Inc., for one, has long had a presence in the People's Republic, though it is based in London and considered a foreign bank. It has nine branches and two representative offices, offers ATM services and other consumer banking products to non-Chinese customers, and provides services for corporations. Like Citi, HSBC was among the foreign institutions to win currency exchange powers this spring, and last year it bought an 8% stake in Bank of Shanghai.
Another Citi rival, American International Group, in May received authorization to open a Beijing life insurance operation. That was a first for a foreign insurer and added to a string of approvals won by AIG to set up similar operations in other Chinese cities. The New York company is already one of the largest sellers of individual life policies in Southeast Asia, a spokesman said, and it intends to market individual life insurance in China as well.
AIG chairman M.R. Greenberg said in a speech at an investor conference in June that China "will be an important growth story" for the company, "not just in life insurance and nonlife, but in other businesses as well."
On Monday Bank of Nova Scotia said it would take an undisclosed equity stake in Xi'an City Commercial Bank.
China gained entry last year to the World Trade Organization, which says that within three years the number of foreign banks operating in China will go from 179 to 279 and that the domestic foreign exchange deposits held by these banks, currently $4.6 billion, will have a threefold increase.
Under the WTO agreement, China also has to liberalize its domestic securities industry. Foreigners currently can own 33% of Chinese securities brokerage and fund management companies; that will rise to 49% by 2004.
But if deregulation in auto lease financing is any indication, U.S. banks might have to wait longer than expected. A report in Tuesday's Wall Street Journal said China is coming up short on its promise to let foreign companies offer auto loans as soon as the WTO membership came through. This is raising concerns that the government is dragging its feet on the broader issue of banking reform, the article said.
An immediate entry of foreign banks would put Chinese banks at a disadvantage, because the outsiders have stronger balance sheets and better technology, said James Moss, a managing director and co-head of the North American financial institutions group at Fitch Ratings. In the meantime, Citi will "keep going as far forward as they are allowed to go," Mr. Moss said. "China is an important part of Citi's future."
Michael Mayo, a bank analyst with Prudential Securities, said China is "potentially a huge frontier for banking," like other emerging markets it also has potential for trouble.
Plus, Citi's track record in emerging markets is spotty, Mr. Mayo said. It removed Victor Menezes, who had been head of global emerging markets, from the post in June, after it had unexpectedly steep losses from Argentina. It also eliminated emerging markets as a separate business line, configuring foreign operations under a new Citigroup International umbrella.
"They talk about it in a sexy way," Mr. Mayo said of Citi in China, but the talk has also had a "lack of detail," he said.
There are some sparks, but "I would not rely on much at this point," Mr. Mayo said.
Much of what Citi has been doing is mapping a strategy. Mr. Stanley said that it might do more hiring "depending on the expansion of our business, but our focus will be on developing senior local management talent." In July 2001 Citi hired Francis Leung as managing director and chairman for Salomon in Asia, and in October it hired Margaret Ren as the head of China investment banking.
In an April interview, Robert Morse, co-head of global investment banking at Salomon Smith Barney, said investment banking prospects seemed brightest in a few sectors, notably telecommunications.
Salomon moved its U.S. head of telecom to Hong Kong to position itself, Mr. Morse said. "We've developed a multipoint plan, if you will, how through investment banking, corporate banking, and some other initiatives we are going to try to grow with the Chinese economy."
Citi has been in advanced negotiations to acquire a stake in the government-owned Pudong Development Bank, in Shanghai, according to news accounts from the region. Pudong has 15 branches.
"I think there is a real opportunity," said Richard X. Bove, an analyst at Hoefer & Arnett. It has no true edge now, he said, and it could take four to five years to build profitable operations, but the market demands its product variety and "Citi has a huge amount of money to take advantage of opportunities."
