China's Banking System and How Citibank Can Capitalize on its Liberalization
McGeehan, Kevin
2005
- Submitted in partial fulfillment of the degree Master of Arts in Law and Diplomacy at the Fletcher School of Law and Diplomacy. Abstract: The potential that China's economy holds as it moves to a more liberal market economy is limitless, and Western firms are eager to become the first movers in their industries to take advantage of this promise. Western banks are no exception. Chinese regulations ... read morehave historically limited the operations of foreign banks, but with the entry of China into the World Trade Organization, that is all slated to change - in theory. Geographic limitations for foreign banks are to be lifted by December 2006, along with a host of other restrictions that have retarded the growth of these Western banks and the Chinese banking sector as a whole. Progress on these liberalizations has been slow, however, and Chinese regulators have even put other limitations in place that will hurt competition in the long run. This is far from the only problem facing the Chinese banking sector. Decades of policy lending have saddled the four state-owned banks with an unhealthy level of non-performing loans from state-owned enterprises. Asset management companies have been created to manage these NPLs, but the situation is far from stable. A lack of corporate governance has also created an environment where management of banks is opaque and corruption widespread. The risks inherent in this industry are great. In this environment then, what is Citigroup's best method of operation? Once reentry to the market was allowed, Citigroup pushed hard to maintain its control in China by avoiding joint ventures and operating independently. As this strategy stalled and its competitors gained the upper hand in the country, Citibank changed its approach to embrace joint ventures and entertain the idea of buying into the state bank system. Is this the right approach? Citibank is right to pursue joint ventures at this time, especially because building its own structures in China would be cost-prohibitive and too slow to develop. At the same time, the bank must be careful with whom it associates in China. The possibility of corruption or mismanagement is still significant with regard to partnerships with state-owned banks. It also cannot expand its offerings too quickly or expose itself to too much risk. It should use its government connections to speed up the deregulation process, plan for the time when this becomes a reality, and train native Chinese workers in Western bank practices. Citibank is currently not the most successful foreign bank in China; that title belongs to HSBC. A combination of prudent growth and innovative service upgrades should allow Citibank to compete with and eventually overtake its rival in this burgeoning market.read less
- ID:
- h128nr010
- Component ID:
- tufts:UA015.012.DO.00098
- To Cite:
- TARC Citation Guide EndNote
- Usage:
- Detailed Rights