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Banking & Finance

Citigroup ‘eyeing exit from China Securities venture’

  • Citigroup’s talks with Orient Securities to raise the US bank’s stake to 51 per cent have led nowhere, leading executives to consider other options
PUBLISHED : Tuesday, 13 November, 2018, 10:52am
UPDATED : Tuesday, 13 November, 2018, 10:39pm

Citigroup may seek to exit its securities joint venture in China in favour of a set-up where the US bank can wield majority control, according to people familiar with the matter.

Talks with existing venture partner Orient Securities about Citigroup raising its stake to 51 per cent from 33 per cent haven’t led anywhere, leading executives to start weighing other options, the people said.

Citigroup also wants the venture to push into equities and fixed-income trading, a move that would put it in direct competition with Orient Securities, they said.

Citigroup’s deliberations are an echo of JPMorgan Chase & Co.’s move in 2016 to split with its then partner to create a new securities venture. It also illustrates some of the roadblocks Western banks face as they try to take advantage of new rules allowing them to purchase majority stakes in ventures in the world’s third-largest securities market.

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The US bank’s desire to find a new partner stems from wanting majority ownership of the venture, called Citi Orient Securities, rather than from any disagreements with Orient Securities, the people said. The two partners are still in discussions and Citigroup has not made a final decision, according to the people, who asked not to be named because the talks are private.

“Citi is making strong progress organically in China and we are committed to further growth and are pursuing multiple engines of growth including with a local market venture,” the bank said in an emailed statement, without elaborating. Orient Securities declined to comment.

Running a joint venture together with a local securities firm presents issues because in some cases, the venture ends up competing with the partner. Citigroup could get around that problem by establishing an entity together with companies that aren’t in the securities business.

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Citi Orient’s revenue dropped 10 per cent to 1.04 billion yuan (US$150 million) last year, a decline the company attributed to a tightening regulatory environment and China’s efforts to control indebtedness. Meanwhile, Orient Securities’ revenue surged 53 per cent, driven by brokerage, sales and trading and investment management.

Citigroup generates just over US$1 billion of revenue a year from its China-based clients, one of the people said.

Citigroup was a late entrant into China’s securities market after trying for years to find a local partner. It opened its joint venture in 2012, the year the Chinese government allowed foreign players to boost their stakes to 49 per cent.

Lately, the firm has focused on building the rest of its onshore operations, securing several licenses for its fixed-income business that’s separate from the venture.

Authorities last year announced that they would let overseas partners take majority stakes, and UBS Group, Nomura Holdings and JPMorgan have applied for permission to do so, according to regulatory filings. Morgan Stanley has said it’s in talks to take a 51 per cent stake in its local venture but has yet to file a formal application.

Wall Street’s US$45 trillion China dream inches toward reality

How Beijing decides to award the first approvals to take 51 per cent stakes will shed light on the extent to which US President Donald Trump’s trade war with China has hurt the prospects of US firms. While China’s market has short-term challenges, there’s nevertheless a vast opportunity in a nation of 1.4 billion people with an economy growing at a more than 6 per cent annual pace.

Citi Orient ranks 12th this year in underwriting equity offerings in China, behind Goldman Sachs’s local entity but ahead of those backed by UBS and Deutsche Bank, data compiled by Bloomberg show.

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