Friday, November 10, 2006
Long March: In China, Citigroup Encounters Hurdles to Retail-Banking Plans --- New Rules Could Delay Access To Coveted Mass Market; Foreign Firms Crowd In --- Installing ATMs at 7-Eleven
By James T. Areddy
10 November 2006
The Wall Street Journal
(Copyright (c) 2006, Dow Jones & Company, Inc.)
SHANGHAI -- Five years ago, China pledged to open its banking market to foreign competitors, and Citigroup Inc. didn't hesitate.
As Beijing dribbled out opportunities, the New York-based banking giant seized them. It set up units to lend foreign currencies, trade bonds and package derivatives. It began installing ATMs, and, through a partnership with a Shanghai bank, launched a credit card. Last year, it bid about $3 billion for a controlling stake in Guangdong Development Bank, which has 501 branches.
But Citigroup hasn't yet been allowed to reach out to ordinary retail customers in the world's most populous nation. Today, it operates just 13 branches in six Chinese cities. Its growing network of ATMs, including a new one at the Great Wall, so far exists to spit out cash mainly to foreign visitors and to publicize its brand.
At the moment, neither Citigroup nor any other non-Chinese bank can take deposits from individuals or make them loans in China's currency, the yuan. Citigroup's own employees, in fact, have to be paid through accounts at Chinese banks. Citigroup's experience in China has involved clawing through a thicket of regulations and making compromises in the hopes of one day sharing in what may be the banking industry's biggest prize.
Next month, China is supposed to lift all remaining restrictions on foreign banks, fulfilling a promise that helped it gain membership in the World Trade Organization in 2001. But a raft of new rules passed on Wednesday by the State Council, China's highest administrative body, threatens to further delay access to ordinary Chinese customers, leaving some foreign bankers wondering how eager Beijing really is to give them the run of its coveted market.
"The intent was to open the sector to the maximum extent possible," says Charlene Barshefsky, the Clinton-era U.S. Trade Representative who helped negotiate the WTO agreement. Ms. Barshefsky, now a partner at Washington law firm Wilmer Cutler Pickering Hale & Dorr LLP, characterizes any new hurdles as "troubling" and "certainly not the intent of the agreement." She declines to discuss whether she is representing any U.S. banks in China.
China contends it is complying with the spirit of the agreement and is merely subjecting foreign banks to many of the same requirements Chinese banks face. The rules will "strengthen and improve the supervision and management of foreign banks and promote the stable operation of the banking sector," the State Council said in a statement Wednesday.
More than 70 foreign banks are vying for a piece of the Chinese market. For now, nearly all of them, including Bank of America Corp., have decided not to roll out their own brands for consumer banking in China. Instead, they are taking stakes in Chinese banks and may try to introduce their own products through them, or are sticking to niches like corporate banking or private banking for rich customers.
Citigroup is one of about 10 big foreign banks -- and the only American one -- with plans to go after Chinese retail customers under their own flags. Citigroup boasts of operations in about 100 nations, and consumer banking is a mainstay in many of those nations. Up for grabs in China, Citigroup estimates, is a "bankable" population of 300 million to 400 million of the nation's 1.3 billion people. Citigroup aims to target the emerging middle class and the new rich.
Charles Prince, Citigroup's chairman and chief executive officer, said earlier this year that it would be "almost criminal" not to position the bank for the long term in China. Chinese individuals have stashed roughly $2 trillion worth of yuan in the nation's commercial banks, according to China's central bank. That's equal to 70% of total consumer deposits at commercial banks in the U.S. "It may be . . . that 20 years from now, China will be the largest consumer market in the world," he said.
Citigroup, which currently employs about 3,000 in China, is called "Hua Qi," Chinese for American flag. U.K.-based HSBC Holdings PLC has also made Chinese retail banking a priority. Michael Smith, chief executive of HSBC's Hongkong & Shanghai Banking Corp. and chairman of its Hang Seng Bank Ltd. unit, characterizes the opening of the market as more like "an evolutionary step."
In HSBC's Shanghai offices, two dozen customer-relationship managers face monthly targets for sales of foreign-currency financial products such as mortgages and time deposits. The crown for "deposit king" recently went to an HSBC manager who brought in about $3 million of deposits, mortgages and other business in a month.
Foreign banks have long yearned for access to the China market. Many, including Citigroup's predecessor company, were active around Shanghai's famed riverfront Bund from the beginning of the 20th century, but pulled out after the Communist takeover in 1949.
After China adopted market reforms, regulators allowed Citigroup to open a south China office in 1983 and to return to Shanghai in 1985. But Citigroup and other foreign banks could neither take deposits from Chinese customers nor make loans to them. They couldn't do much aside from work with multinational companies expanding into China.
The landmark agreement for China to enter the World Trade Organization in 2001 was designed to change that. Ms. Barshefsky, who was President Clinton's lead negotiator on the matter, recalls that China was worried its weak domestic banks would be overrun by foreign ones. The agreement called for the market to open to foreign competition in stages so that China would have time to repair its banking system, which was burdened with bad loans.
China laid out a five-year timetable governing when and where foreign banks could begin taking on various categories of customers. Customers banking in foreign currency would come first, followed by Chinese companies doing business in yuan, then Chinese consumers with yuan. "Within five years after accession, foreign financial institutions will be permitted to provide services to all Chinese clients," read a short passage about banks in the 900-page WTO agreement.
In March 2002, three months after the WTO agreement took effect, Citigroup swung open the doors of a new branch in the landmark Peace Hotel on Shanghai's Bund. Four hundred customers were in line, the bank says. Citigroup became the first foreign bank to interact with Chinese consumers, taking their deposits in U.S. dollars and other foreign currencies.
Each WTO anniversary was expected to bring new expansion opportunities for foreign banks. But foreign bankers say that from the start, Chinese officials treated the dates as points at which foreigners could begin applying for the promised access. Actually getting the permission takes time, they say.
In 2002, Citigroup agreed to pay $67 million for a small stake in Shanghai Pudong Development Bank Co. The partners later released a co-branded Chinese credit card, a first in China. Citigroup has not disclosed details about how the card program is faring.
In 2003, Citigroup gained the right to do business, in yuan, with Chinese corporate customers. It built a desk to trade in Chinese government bonds and began to design yuan-denominated financial derivatives. It became a custodian for Chinese pension-fund money.
During this period, China worked to strengthen its own banks. In 2003, Liu Mingkang, an English-speaking former banker, was tapped to run the newly formed China Banking Regulatory Commission. The government sank $60 billion into China's three biggest banks, dramatically reducing nonperforming loans.
China had capped foreign ownership stakes in domestic banks at 25%. Nevertheless, one year ago, Citigroup challenged the limit with a $3 billion bid for 85% of Guangdong Development Bank, or GDB, which is owned by the Guangdong provincial government. If successful, the deal would allow Citigroup, along with its co-investors, to reshape a major Chinese bank with a nationwide license and assets of $48 billion.
Song Hai, a vice governor of Guangdong Province in charge of its economic portfolio, was eager to develop the region's financial-services industry and had welcomed investment by foreign companies. Mr. Song encouraged Citigroup to bid for outright control, according to another government official familiar with the situation. A former banker, Mr. Song is considered an economic reformer, and unlike most officials, is not a member of the Communist Party. A spokesman for Citigroup declined to comment on any aspect of the GDB bid, as did Mr. Song.
From the start, the bid was a long shot. China Construction Bank Corp. went public around the same time, and its stock had surged on the Hong Kong stock exchange. Some government officials complained that the stock's initial pricing had been too low, and that liberals in China's government were selling the jewels of the nation's financial system on the cheap to foreigners.
In late 2005, France's Societe Generale AG made a competing bid for GDB, structured not to breach the 25% ownership cap. Confident that a deal would be announced by the Chinese New Year in January, Societe Generale officials strung traditional red envelopes around their Paris office and bought Champagne, according to a banker in that office.
Senior government officials took an interest. In March, Premier Wen Jiabao said that "the state must have absolute controlling stakes" in state banks. Still, during a visit to China later that month, U.S. Sen. Charles Schumer heard "positive things" about Citigroup's bid when he met with its bankers and People's Bank of China Gov. Zhou Xiaochuan, who is considered a reformer.
But in mid-April, Chinese bank regulators sent a letter to Mr. Song's Guangdong government reiterating the 25% ownership cap. Citigroup scaled back its ambitions. Its current bid as part of a consortium would comply with the foreign ownership cap, although Citigroup still wants control of GDB's board of directors, people familiar with the matter say.
On Aug. 14, Citigroup and other foreign banks with designs on the Chinese market got a surprise: a three-page document outlining a new set of requirements to meet before they are allowed to take deposits in yuan from Chinese individuals. Among other things, the new rules call for foreign banks to incorporate their operations locally. The bankers conferred by conference call to figure out what the new requirements meant.
The following week, the foreign bankers met in Beijing with Wang Zhaoxing, deputy chairman of the bank regulatory commission. He explained in Mandarin that in addition to putting up $125 million in capital for the first six branches, each bank would need to establish a stand-alone holding company, incorporated in China with its own board of directors, much as Chinese banks are structured, according to attendees.
Mr. Wang outlined other requirements that foreign bankers contend will limit or delay their access to individual Chinese customers. Foreign bank branches, for example, will need to be open for three years -- and to be profitable for two years -- before authorities will let them take yuan deposits from individuals. Government officials have said the timetable is meant to protect Chinese depositors until a deposit-insurance program can be established.
Citigroup says the most important facet of its push into China is to build its own retail-banking operation. That priority would become even more critical if its GDB bid fails or its effort to boost its 4% stake in Pudong Development Bank falls short.
Anand Selvakesari, who is in charge of Citigroup's retail-banking operations in China, plays a key role in that effort. Among other things, the 39-year-old veteran of the bank's business in India is in charge of finding locations for branches and hiring managers to run them.
"We have to get new customers," says Mr. Selvakesari, who arrived in Shanghai in April. ATMs are one strategy. Electronic banking is already popular in China, but Citigroup cannot yet issue its own ATM cards in the country. Visitors and others with foreign bank cards can use its machines to withdraw yuan. Citigroup collects fees for such usage.
It regards the machines as a form of advertising, an alternative to billboards, and has installed them in 7-Eleven convenience stores, in airports and in a hotel at the portion of the Great Wall closest to Beijing. "Our objective is to create awareness," Mr. Selvakesari explains. By year's end, Citigroup intends to have 85 machines in place, and it has made separate arrangements to give its customers access to thousands of local-bank ATMs. Eventually, it hopes to use its network to service Chinese retail customers.
Citigroup used a similar tactic in India, where foreign branch banking is also highly restricted. It now has hundreds of ATMs spread over 30 cities there.
For now, Citigroup is reaching out to China's wealthy by marketing fancy deposit products tied to stocks and commodities which it already has permission to sell, such as an investment account linked to the stock performance of five retailers. Mr. Selvakesari targeted affluent customers in Singapore with similar products in the mid-1990s. He says they offer customers higher returns than basic Chinese savings accounts do, and they underscore Citigroup's global reach.
Mr. Selvakesari says he wants to get wealthy people buzzing about Citigroup. He arranges for prospective customers to test drive Ferraris and Range Rovers. His team has invited prospects to "micromarketing events" such as presentations on feng shui, wine appreciation, health and economics.
Tang Hanting in Shanghai contributed to this article.