Citibank in China Welcomes the Yuan

Many rules remain, but qualified foreign banks can now accept yuan deposits from savers, a move they hope will reap profits down the road

This is one trip to the bank that Lu Lugang won't soon forget. On Apr. 23, he showed up at Citibank's (C) flagship branch in the financial district of Pudong in Shanghai to open an account with an initial deposit of 80,000 yuan—or about $10,370. He then was treated like some Chinese film celebrity. As young women in bright silk outfits pounded on traditional drums, a barrage of flashbulbs went off, and Citi executives toasted him with glasses of Moët & Chandon champagne.

Why all the fanfare? Lu, a 36-year-old global sales account manager at a U.S. office equipment supplier was the first Chinese customer ever to open an account in local currency with Citibank. Lu's deposit is the minimum required to open a savings account and symbolizes the latest bit of Chinese financial liberalization that foreign bankers have wanted for some time: the ability to do business in local currency with retail customers in China. "This is a mini big bang," said Lee Ah Boon, country business manager of Citibank (China). "This is the beginning of a new chapter."

Elsewhere across town in Shanghai, and in other major cities in China, similar scenes were unfolding at branches of HSBC, Standard Chartered Bank, and Hong Kong-based Bank of East Asia—along with Citibank, the first four foreign banks granted the long-coveted license. This enables them potentially to do business with China's entire population of 1.3 billion people and tap into some $2 trillion worth of household savings.

Expectations vs. Reality

While foreign banks have been able to do local currency business with corporate clients, they only received permission to take foreign currency deposits from individuals—a niche business—in 2002. China's allowing them to do business with ordinary citizens is in keeping with a timetable spelled out by the World Trade Organization, which China joined in 2001. To do so, foreign banks must incorporate as local banks, which, in theory, will enable then to compete with Chinese banks on an equal footing.

But the reality is quite different. Foreign banks are initially restricted to taking deposits from, and making loans and mortgages to individual customers. But other services, such as issuing ATM, credit, and debit cards and other bread-and-butter services at which multinational banks such as Citigroup and HSBC (HBC) excel, will have to await further regulatory approval because each separate banking product requires a license.

What's more, these four banks, which have about 90 branches among them, will be limited to opening three new branches a year—though they're no longer required to provide separate capital for each new branch, a costly form of expansion that still applies to foreign banks that have not yet restructured to become local entities. Competing with the likes of Industrial Commercial Bank of China (ICBC), and Bank of China (BOC), with hundreds of thousands of branches between them, poses a considerable challenge, too. The roughly 70 foreign banks in China account for fewer than 2% of total deposits.

Convenience of a Global Brand

Indeed, the foreign banks aren't planning to tap into the mass market just yet. Instead, they're focusing on white-collar workers and entrepreneurs. The roughly $10,000 minimum deposit required to avoid paying monthly maintenance fees for standard accounts (and a $100,000 minimum for wealth management accounts) is to ensure customers can avoid the tortuously long lines often encountered at China's state-run banks. Citi launched private banking—with its $10 million minimum in net assets—last year, and Standard Chartered plans to offer its services within a month.

Foreign banks hope to leverage their international network and global brand to appeal to local customers like Lu. Though he has a savings account with Bank of China, and ICBC sold him the mortgage on his apartment, Lu opted for Citi because its "global brand is very famous." Plus, Lu likes the convenience it offers him through its overseas branches when he is traveling for work.

Like local banks, foreign banks are bound by regulatory limits on the interest rates they can pay on deposits and charge on loans, making risk management a challenge. However, the current spread of 3.6% between interest on deposits and loans is an attractive margin.

Getting Accustomed to Debt

The bigger challenge: convincing Chinese consumers to put their money into banks at all. Though Chinese households sock away about 25% of their income, returns on deposits aren't much of an enticement. A one-year time deposit with the bank earns just 1.98%, and seven-day call deposits only 1.62%. That looks pretty paltry set against the performance of the Shanghai stock market, which has risen more than 160% in the past 12 months.

Chinese consumers are also particularly averse to credit card debt. While the average outstanding credit card balance in the U.S. is about $3,000 per month, in China, it is virtually zero. Local banks charge less than 10% on outstanding balances, making it very difficult for card issuers to cover their costs—between $50 and $100, according to Mike DeNoma, Standard Chartered's global head of consumer banking. "It will be 2014 or 2015 to get to those levels of average outstanding balance…" to earn enough fees to break even, he says. "There's not much revolving credit at all."

Citi's Boon is more sanguine about people's willingness to use plastic. "It will change. The younger-age people are a lot more independent and confident about their future, so they may decide to borrow," he says, drawing a comparison to the once-frugal ways of the Taiwanese who now embrace credit. "It's a natural evolution of consumerism," he adds.

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