China Wants Citigroup to Expand

Source: The Wall Street Journal by James T. Areddy

In Frank Talk, Senior Regulator Says Other Foreign Banks Need to Bulk Up in This Populous Nation

SHANGHAI -- A top banking regulator in China said Citigroup Inc.'s local operations "absolutely" should expand in the country, suggesting the U.S. government's big stake in the bank isn't troubling Chinese regulators.

Citigroup's China unit was "very prudent and careful" amid the global financial crisis and now should be "expanding, absolutely," Yan Qingmin, director of the Shanghai branch of the China Banking Regulatory Commission and one of the top regulators for foreign banks in the country, told The Wall Street Journal in an interview.

Showing an unusual willingness by a regulator to comment on an individual company, Mr. Yan offered a glimpse into how China views the recent overhaul of the U.S. financial system and said Citigroup should take advantage of growth in the Chinese economy and expand in the world's most populous nation.

He signaled a view that despite the shock of seeing an "aircraft carrier" of the U.S. financial industry fall into the government's arms, Washington's support for Citigroup was the correct decision and that the result has done little to alter how Chinese policy makers regard the financial-services giant.

"Regarding the U.S. government bailout of Citigroup, I think the American government measures were urgently needed," he said. "They were very timely. At that moment, what we needed most was confidence."

Sitting in a gilded chair in the CBRC's Shanghai headquarters, the 48-year-old Mr. Yan said the crisis that erupted last year with the collapse of Lehman Brothers Holdings Inc. and led to massive bailouts of major financial firms may give rise to "new economic theories or schools of thought" regarding governments' role in market-based financial systems. He didn't elaborate.

The comments suggest that Washington's 34% stake in Citigroup, amassed after offering $45 billion in support this year, isn't a worry for Chinese regulators, and perhaps is a source of comfort. China's own banking industry is controlled by the state, with a Communist Party appointee at the helm of major institutions.

Even as Citigroup's global operations lost $27.68 billion in 2008, its business in China remained healthy. Net profit from its China operation, which includes stakes in local banks, nearly doubled last year to the equivalent of $191 million.

Over the past year, Citigroup has expanded in China, but not as much as other foreign banks, Mr. Yan said. At the end of June, its loan-to-deposit ratio of just $6 in loans for every $10 in deposits was among the most conservative in the industry, he said.

A Citigroup spokesman in Shanghai declined to respond to the regulator's views. Instead, the firm issued a statement saying that "China remains one of Citi's top priority markets anywhere in the world. Our business in China is performing strongly and we continue to pursue growth across all lines of business."

Speaking more broadly, Mr. Yan said foreign banks in the country need to build more substantial operations to attract customer deposits.

However, Chinese rules governing expansion are complex, and so far there is little evidence to suggest that foreign banks are making more money as they extend their networks. Mr. Yan acknowledged that foreign banks have been profitable only in certain areas, such as the trading of Chinese government bonds and currencies, and less so in traditional retail banking, where they continue spending more on new branches than they earn from them.

A natural brake on foreign banks' ability to expand is a requirement that they set up new, virtually standalone operations that are legally incorporated in China. Before foreign banks can offer customers cards to access to automated teller machines, for instance, they need to build a full technology center in China, rather than route transactions through their global computer systems.

Mr. Yan described such requirements as a "risk management" policy. It provides regulators a better look at the business and offers a necessary layer of protection for China's financial system and its consumers, he said.

Regulators want foreign banks to put down deeper roots to strengthen their China entities, including recruiting more top-level staff from overseas and giving China-based teams mandates to operate more independently of headquarters, he said. "We still ask the banks to localize risk management," he said.

Mr. Yan said the biggest lesson from the global financial crisis is that foreign banks in China need to work harder to attract customer deposits and improve the capital structures of their Chinese businesses. Foreign banks now rely too heavily on borrowing from Chinese banks to fund their local operations, he said. That money can dry up, as last year's financial crisis showed.

After the collapse of Lehman Brothers, big Chinese banks all but cut off funding to foreign banks, in particular U.S. institutions, Mr. Yan said. He personally telephoned top officers at each of the country's five biggest banks to press them to lend to their foreign counterparts.

Foreign banks will need time to scoop up more consumer deposits, he said. Some foreign banks also need to improve their reputations after the complex financial products they peddled to Chinese investors in previous years lost money during last year's crisis.

"Getting deposits relies on expanding the network. It depends on marketing with clients. It takes some time to realize," Mr. Yan said.

To boost their capital bases in China, U.K.-based HSBC Holdings PLC and Hong Kong-based Bank of East Asia Ltd. have indicated that they hope to sell shares in their China units on the Shanghai Stock Exchange. Mr. Yan said he is unaware of interest by any U.S. bank in doing the same. Mr. Yan said the regulatory agency will support foreign banks that want to sell yuan-denominated bonds, as HSBC and Bank of East Asia have done this year.

Source article: http://online.wsj.com/article/SB125425605841450345.html