China’s decision to allow Citigroup Inc. to issue credit cards may signal an opening of the banking market as the government relaxes restrictions that are the subject of a U.S. complaint at the World Trade Organization.
New York-based Citigroup is the second foreign bank, and the first Western one, allowed to issue credit cards in the world’s most populous nation.
The announcement yesterday came as the WTO, acting on a U.S. complaint, probes the legality of China’s refusal to let foreign companies issue their own bank cards denominated in its currency, or to permit companies such as Visa Inc., American Express Co., MasterCard Inc., Discover Financial Services and First Data Corp. to process card transactions in China.
“It’s perhaps not a coincidence that this is coming at this point when this case is going on,” said Fredrik Erixon, director of the Brussels-based European Centre for International Political Economy. “But I think it’s more connected to changes on the ground in China, in its policy on competition in banking in China, where we see a cautiously gradual opening.”
China requires foreign banks to “co-brand” with Chinese operators to issue credit cards, and to execute payments through China UnionPay Data Co. The U.S. says the rules contravene a pledge the world’s most populous nation made when it joined the Geneva-based WTO in 2001 to open its debit- and credit-card markets to foreign processors by the end of 2006.
Credit cards are becoming more popular among China’s 1.3 billion people as rising incomes stoke consumer spending. Chinese banks issued 268 million credit cards as of Sept. 30, up 20 percent from a year earlier, according to the central bank.
Bank of East Asia Ltd., Hong Kong's third-largest lender, was the first non-mainland issuer of credit cards in 2008. More banks will probably follow, Erixon said. Hong Kong is a special administrative region of China.
Citigroup had co-branded credit cards with Shanghai Pudong Development Bank Co. since 2003, by providing technical and personnel support. Citigroup recalled its staff at the end of last year from the Chinese bank, whose credit cards will no longer bear Citigroup’s logo, a spokeswoman for Pudong said by phone today, declining to be identified in line with company policy.
Citigroup, which owns 2.7 percent of Shanghai-based Pudong, said yesterday the two lenders remain close strategic partners.
HSBC Holdings Plc, the largest foreign bank in China, in 2009 agreed to set up a credit-card joint venture with partner Bank of Communications Ltd.
Testing the Waters
“If China really wants to stabilize its own shaky banking sector through competition, the right to issue credit cards in your own currency is a critical part of that,” Erixon said by phone from London. “You need to give it to others, too. China moves slowly, it wants to test the waters, see if it’s going to work, if there are going to be any political reactions to it.”
The approval for Citibank probably came with some strings attached, said Jacques Bourgeois, a trade attorney at Wilmer Hale in Brussels.
“If I were in the Chinese authorities’ shoes, I would subject that authorization to a number of conditions that would safeguard my position in the WTO,” he said by telephone from Brussels. “Making a move like this in the middle of a case otherwise appears to me like caving in.”
China requires all yuan-denominated credit card transactions to go through China UnionPay, the nation’s largest electronic-payment network, established by more than 80 banks and other state-owned companies.
Shannon Bell, a spokeswoman for Citigroup, declined to comment on whether conditions were attached to the permission. Nkenge Harmon, a spokeswoman at the U.S. Trade Representative’s Office in Washington, didn’t respond to e-mails seeking comment.
Foreign banks held 1.85 percent of China’s banking assets by the end of 2010, compared with 2.38 percent in 2007. Overseas lenders had 360 outlets in China as of December 2010, compared with the 16,000 owned by Industrial & Commercial Bank of China Ltd., the nation’s biggest lender.
Under Chinese rules, foreign banks must incorporate their operations locally to tap the mass retail market and offer products such as credit cards. They also need regulatory approvals to open outlets and offer new products.
Citigroup operates 13 corporate bank branches and 46 consumer outlets in China.
Citibank said in a statement from Shanghai that the Chinese government’s consent followed preliminary regulatory approval in January 2012 for the lender to set up a joint-venture securities firm in China with Orient Securities Co. Ltd. Citi Orient Securities Co. Ltd. will be involved in investment banking in the Chinese domestic market, including securities underwriting and sponsoring and any other business as approved by China Securities Regulatory Commission.