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Citi plays longer game in China

Hong Kong

CITIGROUP is playing a longer game in China. Even as the mainland economy wobbles, the US mega-lender is ditching its Shanghai underwriting and advisory joint venture to build a brokerage-cum-investment bank it can control. Slumping markets should make finding a new partner easier.

Many foreign financial institutions have already unwound Chinese tie-ups they could not control. Different attitudes toward risk and strategy have proven frustrating for both sides.

In Citi's case, however, there was a structural problem: the bank was unable to use its JV with Orient Securities to offer domestic brokerage services as it had no licence to do so. The Chinese parent company did.

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Now that Beijing has opened the door to companies from overseas to take control of securities trading operations - first to 51 per cent and then eventually 100 per cent - Citi can add onshore broking to its commercial banking business. Unlike UBS, however, which already controls a joint venture offering a full suite of services, Citi's was crippled by its potential to compete with Orient.

Cashing out the 33 per cent stake in Citi Orient Securities will yield a modest financial gain of about US$50 million. More importantly, though, is the strategic freedom it confers.

Corporate lending has proven tough for foreign banks to crack in the People's Republic, but the securities middleman business is a bit more attractive. The 131 brokerages surveyed by the Securities Association of China generated nearly 190 billion yuan (S$37.7 billion) in revenue in the third quarter of 2018 alone.

Citi might be happier with a smaller partner than US$8 billion Orient. It needs one with the right licences - ideally both trading and advising on initial public offerings and such - and the competence to expand nationally. Such an ally would also be cheaper to absorb once the ownership cap is completely lifted.

The 25 per cent slide in China's benchmark CSI300 index, combined with weak bond markets, has put local brokerages on the defensive. That could make them more receptive to Citi's blandishments. Then the hard part, taking on the likes of UBS and Chinese titans including Citic Securities, will start. Either way, Citi seems to be in it for the long haul. REUTERS