An Argument Against Citigroup in China Chinese regulations have historically limited the operations of foreign banks, but with the entry of China into the World Trade Organization (WTO), 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 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 nonperforming loans from state-owned enterprises. Asset management companies have been created to manage these nonperforming loans, 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.
Midway through 2005, Citibank faced significant barriers to growth in China. It had worked hard to become the dominant foreign bank in the country in expectation that the country's banking sector would be opened to all competition in late 2006. The changes mandated by the WTO have been slow in coming. The Chinese government removed some of the legal barriers to entry in some areas, but had erected new ones elsewhere, including raising reserve requirements to unprecedented levels. In addition to regulatory problems, Citibank is facing serious problems in its own approach to strategy in China. It had initially been aggressive in pursuing every opportunity to buy into Chinese domestic firms as a way to gain an advantage on its foreign competitors. This strategy hadn't produced the results that had been expected.
While the Chinese economy is booming at the moment, it is far from stable. Any economy that experiences growth like China has will be more vulnerable to global economic conditions, and the developing nature of China's market means this is even more of a truth. Questions about the long-term stability and viability of the Communist regime will always top the list of risks of doing business in China, but there are specific problems with the banking sector that concern Citibank. The legacy of policy banking has created an environment that lacks a culture of lending accountability. Currently Citigroup is not doing well in dealing with the...