The tricky timing behind Citi’s bet on China

For the past two-and-a-half years, Citigroup has sat on the sidelines while its Wall Street rivals have taken full control of their investment banking units in China, advising on listings and running sales and trading businesses in the world’s second-biggest economy.

Last month, China’s regulator, the China Securities Regulatory Commission, conditionally approved a licence for Citi to follow suit and set up its own investment banking operation in the country, in addition to the corporate and commercial banking operations it already has. But, since Citi first applied for that licence in December 2021, much has changed.

Other global banks have reported sharp falls in the profits of their Chinese investment banking entities and are becoming more cautious about doing business in the country. Citi itself has shifted its priorities and announced a major restructuring. China’s growth has slowed, and tensions with the US have risen, making expansion look less lucrative and more complicated. 

“They have seen the harsh economics faced by their peers”, said Han-Shen Lin, China country head at advisory consultancy The Asia Group. The question, Lin said, was whether Citi would maintain the “minimum capability required” to operate an investment banking unit in the country, “or whether they will go all-in”.

Citi said it remained committed to supporting its clients in China, which it said included more than 70 per cent of the Fortune 500 companies that operated in the country.

“We are committed to developing onshore,” said Citi’s chief financial officer Mark Mason during an earnings call this month. “Having a presence there for our clients is important and that’s part of a strategy that we are discussing.” A spokesman declined to comment on the licence application itself.

Global banks’ mainland investment banking units tend to be small, often lossmaking outfits that scarcely make a difference to global balance sheets. But they were set up as a bet that in the long term, even a tiny foothold in China’s vast economy would ultimately be worthwhile.

Goldman Sachs, JPMorgan Chase and Morgan Stanley won approval to take total or near-total ownership of their mainland investment banking operations in 2021, before Citi made its own application at the end of that year. It had earlier walked away from its Citi Orient Securities investment banking joint venture in 2019, because Orient would not sell it a majority stake.

The tone from the top of other Wall Street institutions has started to change. “The risk-reward calculation has changed dramatically,” JPMorgan chief executive Jamie Dimon said during this month’s World Economic Forum in Davos. China, these days, represented more of the former for his company, he said.

Similarly, Goldman chief executive David Solomon, speaking at the Financial Times’s Global Banking Summit in November, said a “growth at all costs” strategy for China was no longer sensible, and that his firm had pared back operations there.

When several of the banks last year reported falling profits in their Chinese units, they attributed it to Covid-19 restrictions, US-China trade tensions, China’s property crisis and reduced onshore stock trading, among other difficulties. 

Chinese regulators have also asked them to rein in pay and delay bonuses. And the US has introduced sanctions and ratcheted up restrictions on investment in China’s AI and chip industries, forcing banks to be cautious about the work they take on.

Citi’s approval has come at a time when the bank is looking to simplify, despite it long heralding its vast network of regional offices as its main advantage over US rivals.

During the past 18 months, it has wound down more than a dozen international retail banking operations, including in China. In October, Citi sold its Chinese consumer wealth business to HSBC. 

Late last year, Citi unveiled an ambitious restructuring, a big part of which was to cull regional managers and reorientate the bank around its five main businesses, run out of its US headquarters in New York by managers who directly report to Citi chief executive Jane Fraser.

China requires that foreign companies’ onshore operations be managed locally, with at least 30 staff. That is at odds with Citi’s simplification strategy, though China is not the only country with some location-based staffing requirements.

“When they withdrew from the China consumer banking business, I wondered what their commitment to the China market was, and if they would go as far as to withdraw the application” for an investment banking licence, said Lin. However, he said, pulling the application would have caused a “loss of face” for Citi and for China’s regulators.

For Citi, part of the appeal of the new licence is that it would enable it to pitch its services as an onshore underwriter and a full-service bank to clients of its corporate and commercial bank on the mainland.

A significant shift in Chinese corporate finance has made the mainland investment banking licence more desirable in one regard. Shanghai’s and Shenzhen’s stock exchanges became the world’s biggest listing destinations by value in 2022 and 2023, figures from Dealogic show, as Chinese companies increasingly listed on the mainland instead of in Hong Kong or New York, and as listings tumbled elsewhere. 

However, it is not a lucrative market for foreign banks, which face low fees, limited brand recognition and fierce competition with local rivals. And on the Shanghai Stock Exchange’s fast-growing Star market, banks are required to invest in the listings they advise on, a further obstacle.

But without the licence, Citi has found itself unable to underwrite listings in the world’s biggest market at a time when rivals such as UBS and Goldman Sachs could. Once the new operation is in place, it will at least have the option to catch up.

Additional reporting by Hudson Lockett and Cheng Leng