China: Citi to issue own-brand credit cards
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China: Citi to issue own-brand credit cards

Permission after WTO complaint; But why Citi before HSBC?

Citi can issue credit cards in its own name in China – the first time a western bank has been permitted to do so, in a development that raises a lot of questions.

Strictly speaking, Citi is the second foreign institution to be allowed to do this – Bank of East Asia was first – but as the first leading global banking powerhouse, it is an important step for several reasons.

The macro perspective is to look at this in light of a US complaint to the World Trade Organization that China is failing in its WTO obligations in financial services.

Until Citi, no US or European companies had been permitted to issue their own bank cards in renminbis, neither had card specialists, such as Visa, MasterCard or American Express, been allowed to process card transactions on the mainland. Instead, foreign banks have had to co-brand with a Chinese partner in a joint venture (JV), and to execute payments through a state-backed electronic payment network called China UnionPay Data.

This, the US complains, is despite a pledge China made when it joined the WTO in 2001 that its debit and credit card markets would be opened to foreigners by the end of 2006.

Consequently, one reading of the Citi announcement is that China is ready to meet those WTO obligations and open its financial services industry further.

A more micro perspective would ask: what is so special about Citi? Like other banks with card businesses, it had set up a JV in China, with Shanghai Pudong Development Bank. That venture has been issuing cards since 2003.

Citi says that, "coinciding with the move", Shanghai Pudong will continue to be responsible for that venture. Euromoney understands that Citi sold its half of the venture to Shanghai Pudong, conditional upon the Chinese partner lending its support to Citi’s own application to get a licence in its own name.

It is notable, too, that the credit card licence comes within weeks of Citi obtaining regulatory approval for its securities JV on the mainland with Orient Securities, to become Citi Orient Securities. Like most other JVs, bar the earliest movers Goldman Sachs, UBS and CLSA, this will allow Citi to conduct securities underwriting in the Chinese domestic debt and equity markets as well as M&A advisory.

The two new approvals in aggregate mean that Citi now has the same franchise on offer in China as it does everywhere else.

Stephen Bird, chief executive for Asia Pacific at Citi

Stephen Bird, Citi 

Stephen Bird, chief executive for Asia Pacific at Citi, tells Euromoney: "It means we’ve now got the entire Citigroup franchise built out in China: the corporate bank; a retail bank in 13 cities; an investment bank [for domestic underwriting] that will go live in the summer; and now our own credit cards. Citigroup’s whole range of business lines will be active in China."

This is a turnaround, for although Citi’s corporate and consumer banking operations in China have long been impressive, the delay in securing an investment banking JV has been a conspicuous gap.

It is tempting to wonder whether the sudden improvement in Citi’s China licensing arrangements reflects a near decade of success in the Shanghai Pudong JV, or the fact that Citi did not sell its stake in Guangdong Development Bank during the global financial crisis when numerous other westerners did. There’s surely no question that helped, but Citi was not the only one to hold the line.

This brings us to another tantalizing question: why Citi before HSBC? HSBC did not sell any of its 19.9% stake in Bank of Communications (its stake in Ping An) during the crisis, and is at least as much a fixture on the mainland as Citigroup – with 110 mainland branches it is the largest foreign bank in China. One assumes a licence will follow for HSBC, which has offered co-branded credit cards in China since 2005 and now has 20 million cards in circulation, has 10 senior personnel seconded to BoCom’s Pacific Credit Card Centre unit, and is awaiting regulatory approval for a new joint venture company to extend that cooperation.

It is a business that competitors will not want to miss out on. According to the People’s Bank of China, mainland banks – including JVs – issued 268 million credit cards as of September 30, 2011, representing a 20% leap year on year. Mainland Chinese people discovering plastic indebtedness is big business.

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