Citigroup to weigh new China securities JV

HONG KONG • Citigroup Inc is considering ending its securities joint venture (JV) in China as it weighs trying to find a new local partner that would let it take majority control of such an entity, according to people familiar with the matter.

New York-based Citigroup has held discussions with its existing partner about boosting its stake in the JV — Citi Orient Securities Co Ltd — to 51%, but those talks haven’t led anywhere, the people said. That’s in part because its partner, Orient Securities Co Ltd, has expressed reluctance to sell, they said, asking not to be identified.

Citigroup’s deliberations are an echo of JPMorgan Chase & Co’s move in 2016 to split with its then-JV partner to create a new securities venture. It also illustrates some of the roadblocks facing Western banks as they try to take advantage of new rules allowing them to purchase majority stakes in JVs in the world’s third-largest securities market.

Orient Securities owns 67% of the JV and Citigroup holds the rest. The US bank’s desire to find a new partner stems from wanting control rather than from any disagreements with Orient Securities, the people said. The two partners are still in discussions and Citigroup hasn’t made any final decision, according to the people.

“Citi is making strong progress organically in China and we are committed to further growth and are pursuing multiple engines of growth including with a local market JV,” the bank said in an emailed statement, without elaborating. Orient Securities declined to comment.

Citigroup has also cooled on the prospect of boosting its stake because it wants to apply for a secondary-market trading licence that the JV doesn’t have, the people said. Doing so would put it in direct competition with Orient Securities. Setting up with new partners that aren’t in the brokerage business would help get around that issue.

Citi Orient’s revenue dropped 10% to 1.04 billion yuan (RM628.5 million) last year, a decline the company attributed to a tightening regulatory environment and China’s efforts to control indebtedness. Meanwhile, Orient Securities’ revenue surged 53%, driven by brokerage, sales and trading and investment management.

Citigroup generates just over US$1 billion (RM4.19 billion) of revenue a year from its China-based clients, one of the people said.

Citigroup was a late entrant into China’s securities market after trying for years to find a local partner. It opened its JV in 2012, the year the Chinese government allowed foreign players to boost their stakes to 49%. Lately, the firm has focused on building the rest of its onshore operations, securing several licences for its fixed-income business that’s separate from the JV.

Authorities last year announced that they would let overseas partners take majority stakes, and UBS Group AG, Nomura Holdings Inc and JPMorgan have applied for permission to do so, according to regulatory filings. Morgan Stanley has said it’s in talks to take a 51% stake in its local venture, but has yet to file a formal application.

How Beijing decides to award the first approvals to take 51% stakes will shed light on the extent to which US President Donald Trump’s trade war with China has hurt the prospects of US firms. While China’s market has short-term challenges, there’s nevertheless a vast opportunity in a nation of 1.4 billion people with an economy growing at a more than 6% annual pace.

Citi Orient ranks 12th this year in underwriting equity offerings in China, behind Goldman Sachs Group Inc’s local entity but ahead of those backed by UBS and Deutsche Bank AG, data compiled by Bloomberg show. — Bloomberg