Citibank Permitted to Issue Credit Cards in China

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Greater market access to China’s banking industry on the road ahead?

Feb. 8 – U.S.-based financial services corporation Citigroup announced on Monday that it has obtained government approval to issue its own credit cards in China. It is hoped that Beijing’s recent decision indicates that the country will be more willing to open up its banking industry to foreign financial institutions in the near future.

Citigroup – operating 13 corporate bank branches and 46 consumer outlets in the world’s most populous nation – is the first Western bank authorized to issue credit cards in Mainland China. Hong Kong-based Bank of East Asia, the only other non-mainland credit card issuer in the country, was allowed to tap into the China market back in 2008.

“(Citibank) is in a preparatory phase having received regulatory approval and will reveal more details about our China cards business in due course,” said Shanghai-based Citibank Spokesperson Stephen Thomas.

The company is permitted to issue its own credit cards, but all the transactions made on the cards will be processed through China UnionPay Data Co., China’s largest electronic payment network with a monopoly over the handling of local currency (RMB) payment card transactions.

Access to China’s financial sector by foreign banking institutions is still highly limited, even though the government opened up part of the market upon its entry to the World Trade Organization (WTO) in 2001. Foreign banks are required to “co-brand” with their Chinese peers when issuing credit cards and execute all RMB-denominated payments through UnionPay. China also imposes requirements and restrictions that favor UnionPay over foreign suppliers with regards to transactions in foreign currencies.

Under such restrictions, many foreign banks have chosen to collaborate with Chinese banks on credit card business, in order to reach the country’s massive market. Before it obtained the government’s consent to issue its own cards, Citigroup had cooperated with Shanghai Pudong Development Bank – in which Citigroup owns a 2.7 percent stake – to co-issue credit cards since 2003. A similar partnership can also be seen between U.K.-based HSBC Holdings and China’s Bank of Communications, which established a credit card joint venture in 2009.

China’s tight regulatory environment has also shut many foreign payment service providers out of the market. A series of top companies in the field – such as Visa, American Express and MasterCard – have no chance to touch the several hundred billion dollars worth of e-payment transactions processed in China every year.

Unsatisfied with China’s discriminatory limitations on foreign players, the United States filed a complaint within the WTO in September 2010, requesting the establishment of a level playing field that was promised by China when gaining its WTO membership.

Under the terms of its accession to the WTO, China should have fully implemented its commitments to remove market access and national treatment limitations in the e-payment service sector by December 11, 2006, the Office of the U.S. Trade Representative (USTR) said in a news release regarding the case filing with the WTO.

Acting on the U.S. complaint, the WTO started investigations into the case 10 months ago, and commentators believe the concern over a potential adverse ruling is the main motivation for China to say “yes” to Citibank this time around.

“I have no doubt that the WTO case is a major reason why China has issued this license…By this action, they are trying to take the ‘sting’ out of any adverse ruling,” Stuart Eizenstat, a partner with the Covington & Burling law firm in Washington, said in an E-mail to Bloomberg.

However, while the WTO case has a focus on China’s unfair treatment to payment transaction platforms, the government’s approval for Citibank credit cards comes with no commitment to removing the discrimination China is accused of.

China’s decision on Citibank “has no bearing on the U.S. WTO claims,” said USTR Spokesperson Nkenge Harmon.

Some experts believe the nod for Citibank has also revealed China’s need for more competition in its banking sector and may gradually lead to further opening up within the market.

“… I think it (the Citibank case) is more connected to changes on the ground in China, in its policy on competition in China, where we see a cautiously opening,” said Fredrik Erixion, director of the European Center for International Political Economy, a Brussels-based non-profit policy research think-tank.

Echoing Erixion’s opinion on the market opening prospect, Eizenstat believes the permit given to Citigroup “is a positive step to open China’s internal market for financial services, and another step toward their integration into the global market.”

Despite the opportunities offered by China’s entry to the WTO, foreign banks still maintain a minimal presence in China. Altogether, they only held 1.85 percent of China’s banking assets and operated a total of 360 outlets in the country by the end of 2010.

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