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Introduction Recognized as the first American bank to penetrate the Chinese market, Citibank began its operations in 1902.

By the 1930s, [it] was one of the countrys major foreign banks, operating 14 branches in nine cities (Conklin, p. 317). Despite early successes, the communist takeover in China led to the closure of all Citibank branches. It took Citibank more than 40 years to resume operations in Shenzhen, China in 1984. The future success of Citibank hinges on their ability to circumvent potential risks and correctly assess the climate within the current and future market. Potential Market China and WTO China is one of the fastest-growing economies in the world, and for the past 30 years has doubled every 8 years in size, with an annual 9% GDP growth rate (Deresky, 2011). Although the income level of its 1.5 billion citizens is still relatively low (1/3 of the population live on less than $2/day), it is gradually increasing. Today 50K US companies are in operation in China (ibid). Chinas relatively recent accession into the World Trade Organization has set the stage for Citibank to capitalize on new potential markets. As a stipulation to Chinas membership, the country had to lift many regulations that previously barred MNCs from entering their markets. Geographic limitations were absolved, allowing Citibank to expand across China into populations that had been solely served by state-run agencies. Additionally, regulations that limit foreign bank access to the consumer market were abolished. Lastly, membership in the WTO meant that the business scope of MNCs could now consider non-performing loans, state-owned banks, and smaller banks as potential investment opportunities and partners. Market and Growth The Peoples Bank of China (PBOC), Chinas main regulatory agency, expressed concerns that

WTO membership would position foreign competitors to drive ailing Chinese state banks out of their own domestic markets. Due to these concerns, the Chinese government sought to slow down the WTO reformation process with bureaucracy and regulatory stipulations for foreign banks; for instance, new foreign entrants needed to have at least $72 million in operating capital (~$15.7 million USD), and at least two years of profitable operations in order to start doing business in China (Conklin 309). The insurance sector in China held high prospects, with premiums experiencing a steady 20% annual rate of increase despite accounting for less than 1% of Chinas GDP (Conklin 314). However, almost 100 companies were already preparing the market by establishing local connections in Chinese markets prior to WTO admission, despite an inability to conduct business with Chinese citizens. The credit card industry was not as lucrative of an opportunity, given the Chinese governments strong aversion to inflation and interest in increasing economic growth. Culture It is vital to develop positive relationships with government officials, particularly (for Citibank) those involved in PBOC. Guanxi refers to the interconnected network a Chinese individual or business fosters in order to reach favorable future deals. These connections will aid Citibank in navigating their expansion strategy by protecting their first-mover status in China. Since Citibank has a longer-standing presence in China, it may be able to leverage pre-existing guanxi ties not available to other international competitors. Chinese citizens tend to have a longer-term horizon, indicating a strategic preference for longterm investment over short-term profitability (Deresky, 228). This cultural emphasis on longer term results is reflected in national domestic savings rates, which have been reported to be as high as 40% of Chinas GDP (Conklin 315). The ability to bring banking services to the Chinese

populace would give foreign firms access to this valuable pool of funds. The cultural tendency to save also devalues the opportunities of the Chinese credit card market. Chinese cultural values are centered on encouraging personal saving rather than borrowing - this is reflected on a microeconomic scale by the personal habits of citizens, and on a macro scale by the Chinese governments resistance to potential inflation risks. Political Risks Political Instability The Communist Party is, and looks to remain, firmly in control of the country. While there are a number of social problems (working conditions, pollution, low wages, land disputes, etc.) that can be a source of tension, the continued general improvement of the standard of living for the average citizen has a damping effect on any sustained push for reform or related unrest. Recent disturbances in rural areas are likely to remain localized, as affected citizens tend to focus their ire on local party leaders, rather than on the national government (Economist Intelligence Unit, 2012). One area of concern for foreign firms is labor relations; recent strikes have been tolerated by the communist party and have resulted in concessions from affected MNCs (Reuters, 2011). Corruption While the Chinese government has worked to curtail corruption in recent years, evidence seems to suggest that the problem continues to grow more prevalent (Xiaogang Deng, 2010). Although significant legal and moral barriers exist to bribery, the guanxi system works to subvert them through the traditional customary practice of exchanging gifts (Li, 2011). The banking and finance segments are particularly impacted by the effects of corruption (Icon Group International, Inc., 2007).

Weak Legal System China does not have an independent judiciary or an effective regulatory system, nor a tradition of legal enforcement based on common or civil law (Yao, 2009). One would expect that such risks might deter foreign investment, but clearly it has not. Firms have found ways to mitigate such risks by relying on certain informal enforcement mechanisms that leverage social connections and by working through JV stratagems, as Chinas early regulatory efforts afforded some protection to joint-venture firms (even more than was available to non-state owned Chinese firms) (Yao, 2009). Government Regulations/Restriction/Nationalism While the structure of financial regulatory agencies within most developed countries tends to vary somewhat, most feature a high degree of independence from the government as a whole (such as the Federal Reserve Bank in the US), Chinas financial regulatory bodies have little independence from the government. As such, MNCs operating in the country are subject to regulatory decisions that may have more to do with political, rather than economic, considerations (Huang, 2010). While WTO Membership has produced some regulatory easing in the Chinese banking market, the special obligations placed on China as a condition of entry has resulted in slow progress in some areas. Organic growth of foreign banks in China, for example, remains highly restricted, as beyond loan-deposit and other financial restrictions, significant regulatory hurdles must be overcome to open new branches, making partnerships and acquisitions more likely paths for foreign-based market share growth (Yeung, 2009). There is some risk that China may find that costs of WTO membership outweighs the benefits; should the country leave or be discharged from the organization, regulatory liberalization may reverse course and foreign assets could be subject to nationalization.

Economic Risks The International Monetary Fund recently issued a 125-page report warning China that their state-controlled banking system was creating a steady buildup of vulnerabilities that could really challenge their future growth prospects. The way they have set up their banking system encourages high levels of saving, liquidity, the misallocation of assets and the tendency for asset bubbles to grow. Rather than letting the market dictate investment and asset allocation, the government has taken an active role in shaping peoples economic behavior. As most banks in China are state-owned, they have provided more favorable treatment to state-owned companies than more efficient private companies. For example it takes about $5 of investment to generate $1 of gross domestic product, which is 40 percent less efficient than both Korea and Japan (Barboza, 2011). Many believe that the Chineses control of the banking system is at the core of banking risk in China, although the currency instability and rising inflation are two of the greatest economic risks. Currency Instability Foreign exchange rate risk can be partially mitigated by placing financial hedges on the yuan. Additional foreign exchange risk will come into play if exchange rate fluctuations affect company cash flow, the credit risk of banks customers, or the banks competitiveness (Wong, Wong, & Leung, 2008). Exchange rate risk is particularly troubling for low-margin industries such as manufacturing. The Chinese economy relies heavily on manufacturing and these fluctuations may result in bank customers defaulting on loans. Rising Inflation From January 2010 to June 2011 Chinas inflation increased from about 1% to over 6%. The fears of Chinas economic inflation spinning out of control has been reduced some, as inflation

has steadily reduced from its high in mid-2011 through the end of 2011. As of December 2011, inflation was hovering around 4.1% (Back, 2012). While it appears that inflation is slowing, it is always of concern in economies that are expanding. Unanticipated inflation can decrease the value of loan portfolios, as banks are typically net creditors with assets in nominal instruments. Domestic/International Competition Chinas banking system is quite competitive, even more than most places in the world (including the western world). By the end of 2001, 70% of total banking industry assets were held by the four largest banks (the Industrial and Commercial Bank of China, Agricultural Bank of China, China Construction Bank and Bank of China), which are all state-owned banks (Yuan, 2006). Since Chinas inclusion in the WTO in 2001, many foreign banks have entered China; however, they only manage 2.4% of total banking assets (Sufian & Habibullah, 2011). Area banks are not allowed to function nationally and have been able to develop strong relationships in their locality. The government still maintains tight controls on the industry and will likely do what is needed to ensure state-owned banks prevail. Conclusion

Works Cited Back, A. (2012, January 12). China Inflation Slowed Again in December. Retrieved February 3, 2012, from Wall Street Journal: http://online.wsj.com/article/SB10001424052970204257504577155521838302132.html Barboza, D. (2011, November 15). Monetary Fun Urges China to Ease State Controls in Banking. Retrieved February 3, 2012, from NY Times: http://www.nytimes.com/2011/11/16/business/global/imf-warns-china-on-state-control-ofbanking.html Conklin, David W. (2006). Cases in the Environment of Business. Managing Within Alternative Government Structures: CitiGroup in Post-WTO China. Sage Publications, Inc. Deresky, H. (2011). International Management; Managing Across Borders and Cultures. Upper Saddle River, NJ: Prentice Hall. Economist Intelligence Unit. (February 2012). Country Report, China. London, England: Economist Intelligence Unit. Huang, H. (2010). Institutional Structure of Financial Regulation in China: Lessons from the Global Financial Crisis. Journal of Corporate Law Studies, 219-254. Icon Group International, Inc. (2007). Commercial Banks in China: A Strategic Reference. Icon Group International, Inc. Li, L. (2011). Performing Bribery in China: guanxi-practice, corruption with a human face. Journal Of Contemporary China, 20(68), 18. Reuters. (2011, December 28). LG Display plant in eastern China hit by strike. Retrieved January 31, 2012, from Reuters: http://www.reuters.com/article/2011/12/28/us-china-lg-strikeidUSTRE7BR0JH20111228 Sufian, F., & Habibullah, M. S. (2011). Globalizations and Bank Performance in China. Research in International Business and Finance , 3-4. Wong, E., Wong, J., & Leung, P. (2008). The foreign Exchange Exposure of Chinese Banks. Hong Kong Monetary Authority , 4-5. Xiaogang Deng, L. Z. (2010). Official Corruption During China's Economic Transition: Historical Patterns, Characteristics, and Government Reactions. Journal of Contemporary Criminal Justice, 85. Yao, Y. a. (2009). Law, Finance, and Economic Growth in China: An Introduction. World Development, 753-762.

Yeung, G. (2009). Hybrid property, path dependence, market segmentation and financial exclusion: the case of the banking industry in China. ransactions Of The Institute Of British Geographers, 177-194. Yuan, Y. (2006). The State of Competition of the Chinese Banking Industry. Journal of Asian Economics , 2-15.

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