Citi China credit card deal is a landmark

Euromoney, March 2012

Citigroup is to be allowed to 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 interesting 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 major global banking powerhouse, it is a very significant 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 RMB, nor 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, and to execute payments through a state-backed electronic payment entity called China UnionPay Data.

This, the US complains, is despite a pledge China made when it joined the WTO 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 than it has done in the past.

A more micro perspective would ask what’s 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’s notable, too, that the credit card licence comes within weeks of Citi getting regulatory approval for its securities joint venture 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 for the first time Citi now has the same franchise on offer in China as it does everywhere else. “It means we’ve now got the entire Citigroup franchise built out in China,” Stephen Bird, CEO for Asia Pacific at Citi, tells Euromoney. “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, since 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’s 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 didn’t 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. Which brings us to another tantalising question: why Citi before HSBC? HSBC did not sell any of its 19.9% stake in Bank of Communications (nor 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’s certainly a business that competitors won’t 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.