Earlier this morning in New York, Citi and Orient Securities signed a securities joint venture agreement to operate in the Chinese domestic market. The new JV will be called 东方花旗证券有限公司 in Chinese and Citi Orient Securities in English.
It is subject to regulatory approvals that people close to the deal say they hope might come as early as the first quarter of 2012.
Put simply, the JV means Citi can finally operate in the Chinese domestic market, crucially in equity and debt underwriting and advisory services.
“You could say this has basically been the missing piece of the China jigsaw for Citi,” said a Citi banker. “We have a strong corporate bank, global transaction services and China investment bank,” said the source, pointing out that Citi has led $3 billion offerings for CNOOC, CNPC, and Sinochem. “So China IB has been ticking along nicely but local underwriting was a big gap and now that’s being filled.”
Orient Securities Company will have a 67% stake in the new entity with the remaining 33% owned by Citi, which is consistent with existing Chinese regulations. In addition to the investment banking JV, Orient Securities and Citi said they will also explore further cooperation in other areas such as research and training.
“The pairing of Citi’s global capabilities and Orient’s local strengths will create a market leading securities company with the ability to serve Chinese and international companies to help them raise capital from local equity and debt markets. This new partnership underscores our strategic commitment to China’s capital markets and complements our well-established banking franchise in China,” said Stephen Bird, CEO for Citi in Asia-Pacific, in a statement.
Sources at Citi noted that Bird has been a key driving force in the team behind this JV and this is arguably his most important deal since becoming CEO, especially given that when he took over he was open about the fact that this was his top priority.
“We are delighted to be forming this important partnership with Orient Securities, a strong, highly reputable local firm that shares Citi’s management philosophy on building for success. This announcement underlines our continued investment in China to support our clients,” said Andrew Au, CEO for Citi China, in a statement.
Earlier this week, Royal Bank of Scotland opened its China securities joint venture with Guolian Securities, making it the first British-based bank with a licence to underwrite stocks and bonds issued in mainland China.
J.P. Morgan and Morgan Stanley, which both announced tie-ups at the start of this year, could soon follow with the opening of their own China securities businesses. Morgan Stanley is partnering with Huaxin Securities (also known as China Fortune Securities), while J.P. Morgan will team with First Capital Securities. The two banks won their licences on December 31 last year, while RBS secured its licence in November.
But the competition isn’t just from JVs; there are already dozens of mainland securities firms on the ground.
Citi’s strategy is to make this complementary to its existing business, rather than the only hook upon which to hang its hat, and with its large corporate bank in China it says it has literally hundreds of potential A-share candidates to bring to market during the next few years from its small and medium-size enterprise clients.
Citi has been expanding fast in China in recent years and opened recently in Nanjing. That was on the back of recent openings in the Shanghai metro area and at Chongqing airport. It now has a presence in 11 cities with 36 consumer outlets, and aims to hit 50 by year end.
In terms of revenue, Citi is already profitable in China and the bank’s audited results for 2010 in China are expected in the next few weeks. As a region, Asia was the largest for Citi in 2010, and of the $15 billion in revenues in 2010 from Asia-Pacific, about a fifth or more than $3 billion came from Greater China, according to the bank.