Citigroup is used to getting its own way, so its recent travails in China must be painful. It made its China move earlier than its rivals, most conspicuously HSBC, by buying a 4.62% interest in Shanghai Pudong Development Bank in 2003. But Citigroup has failed to capitalize on its head start, despite strenuous claims to the contrary.
One statistic tells the story. Citigroup’s credit card joint venture with SPDB, the key reason for its original investment, boasts 300,000 jointly issued cards. In a little less than a quarter of that time, HSBC’s credit card business with its partner Bank of Communications, China’s fifth-largest lender, has issued more than 650,000 joint cards. HSBC and Bank of Communications already enjoy significant levels of cooperation in other areas too, principally retail and commercial banking.
Stung by its rival’s success, Citigroup now wants to swap partners and is in the final throes of an investment in Guangdong Development Bank (GDB), China’s 11th-largest lender, in which, if it gets its way, it aims to exert management control.
Chinese wives are not easily jilted, however, and SPDB is exacting a high price for Citigroup’s infidelity, forcing the bank to exercise its option to purchase 19.9% of SPDB – and at a high price. Although Citigroup’s original investment of some $70 million for its initial stake was modest, the bank has been caught in the recent crossfire over the sales of stakes in domestic banks to foreign investors at prices that, with the benefit of perfect hindsight, are now deemed usuriously cheap. That spat has played into the hands of SPDB. Citigroup has had no choice but to put up and shut up, while no doubt lustfully eyeing its new bride in southern China.
It all adds up to an expensive foray into China’s banking market, with little to show from two-and-a-half years’ work and millions of dollars. If Citigroup is successful in securing control of GDB and capitalizing on its investment, all these problems will be conveniently forgotten. Mess it up again, however, and HSBC will be miles ahead. China is not a race any global bank can afford to lose.
There are still risks involved. The tie-up with GDB is by no means a done deal. Citigroup is praying for state council approval while, according to insiders, HSBC and a rival suitor for GDB, Société Générale, are busy lobbying Beijing to reject the Citigroup bid given that control is on the table, long denied to other banks investing in China. Even if the deal does get through, there is still the execution risk to consider. Talk to ex-Citi bankers in China and they will tell you that the abrasive American culture of the bank does not sit easily with the mainland Chinese banking market as it struggles with the transition from state-directed lending to full-blown commercialism.
Chinese bankers regard HSBC as altogether a different proposition. That may be something for Citigroup’s board to mull over as it hands over more of its shareholders’ cash for an increased stake in a bank it does not want so that it can invest in a bank it hopes it can control.
