Citigroup's "China" Plans Get Nuked by U.S. Regulators (C'mon Man!)

Citigroup’s long-awaited dream of breaking into China’s securities market just hit a wall—and it’s not a “Great” one. Nope, this time it’s the U.S. regulators pulling the rug out from under Citigroup’s grand ambitions.

(Source: Giphy) 

In short, Citigroup was all set to launch its very own securities firm in mainland China—a major play to deepen its investment banking dominance in one of the world’s biggest capital markets. Sounds great, right? Well, there’s just one tiny problem: they’ve been waiting for a very important clearance letter from the Fed…  that they still haven’t received. 

(Source: Business Standard) 

You see, before China gives Citigroup the licenses they need to start printing money in the Middle Kingdom, they need a letter from the Fed saying the bank is in good regulatory standing. Spoiler: they’re not.

The reason? Well the Fed hasn’t been super thrilled with Citigroup lately, and it has everything to do with the $136M slap on the wrist they got earlier this year. Turns out Citigroup had been dragging its feet on fixing some “minor” issues, like, say, data management and risk controls. You know, the boring but important stuff that regulators care about.

(Source: Reuters) 

However, this fine has continued to become an elephant in the room that’s making things a bit awkward when it comes to the company's “expansion” plans. Especially considering that in addition to the Feds approval, Chinese regulators (while in favor of the expansion) have a rule that says no major fines in the last three years if you want to play in their sandbox. Meaning, Citigroup’s application is now basically sitting in regulatory limbo, waiting for everything to get sorted. 

Translation: China wants Citigroup in its bed, but ensures they get “tested” first. 

(Source: Giphy) 

What’s actually funny about this is that Citigroup was originally hoping to have its China investment banking business up and running by mid-2023. When that didn’t happen, they pushed the goalpost to the end of the year. Now? Well, let’s just say they’re working on “indefinite timelines” at this point. The bank is still waiting on those final approvals, and the situation is fluid.

According to “people familiar with the matter”, they’ve got the people in place—hired senior execs, including a CEO, CFO, and compliance officer—and even had plans for 100+ bankers ready to dive into equities, futures, and debt origination. But none of that matters if they can’t get the paperwork sorted. 

(Source: Global Times) 

So given all this headache, why does this expansion even matter in the first place? Well simply put, being shut out of China’s capital markets is a massive gaping hole in Citigroup’s playbook. The bank had already been offering investment banking services in China through a joint venture with Orient Securities.

(Source: Reuters) 

But they broke that off in 2019 when China opened the door to full foreign ownership of securities firms. Since then, Citigroup has been itching from the sidelines in order to get back in the action. And right now, every delay  just means more lost opportunities in a market that—despite recent slowdowns—is still one of the hottest on the planet.

On the other hand, Citigroup isn’t the only U.S. bank feeling the squeeze. Goldman Sachs, JPMorgan, and other Wall Street behemoths are also navigating a clusterf**k of regulations and geopolitical tensions as they try to expand in China.

(Source: Bloomberg) 

For instance, just last November, Goldman Sachs’ CEO, DJ-Sol (David Solomon), admitted that the firm was taking a more “conservative” approach to China, pulling back from a previous “growth at all costs” strategy. And for good reason—China’s IPO market went full ghost mode last year, with foreign banks working on just 3 out of 313 stock listings in 2022. Aka that’s friggin pathetic even for China. 

(Source: Giphy) 

Yet, despite the massive setbacks and the looming approvals by both U.S. regulators and the China Securities Regulatory Commission (CSRC), Citigroup’s not pulling the plug just yet. CEO Jane Fraser personally met with Chinese regulators last year to double down on the bank’s commitment to the country. 

The bank’s restructuring plan, which included exiting consumer banking in China, was all part of a bigger strategy to focus on institutional businesses like investment banking. So clearly, Citigroup is still determined to make China a key part of its global footprint at all costs.

(Source: Giphy) 

Now of course, the regulatory limbo will eventually end—probably. So if Citigroup can get the Fed to sign off, they could still launch their China investment banking business in the latter half of 2024. But as of now, that’s looking more like wishful thinking than a solid plan. 

In the end, Citigroup’s China strategy is like watching me try to reboot my friggin AT&T WiFi router—waiting way longer than I’d like to for it to connect. Sure, they’ve got the talent, the slimy ambition, and the regulatory support from China (once the Fed gives the greenlight), but right now it seems they are in no man's land for the time being. 

(Source: Giphy) 

The bright side? Citigroup shares are absolutely roaring +17.16% YTD. So in reality, I guess it’s not all that bad. What’s a few more extra months of headaches when the most important people at Citi (see: shareholders) are still making money, amirite? 

In the meantime though, while Citi tries to figure its regulatory “ish” out, stay safe and stay frosty this Monday, friends! Until next time…

Stocks.News does not hold positions in companies mentioned in the article.