Citigroup's Adaptability in China Market Expansion

Citigroup's Adaptability in China Market Expansion

Abstract

In 2001, China became a member nation of the World Trade Organization (WTO). Case analysis of Citigroup in Post-WTO China, proves that Citigroup displayed adaptability in its attempt to expand operations in China. In addition, information is included regarding historical development in business processes needed for such an expansion. Lastly, WTO information regarding commitments made by China to liberalize its marketing regime displays the opportunities made available to Citigroup.

Citigroup's Adaptability in China Market Expansion

On September 17, 2001, the World Trade Organization concluded negotiations on China's terms of membership of the WTO. For acceptance into the WTO China had to agree to certain changes to how it does business. China agreed to undertake a series of important commitments to open and liberalize its regime in order to better integrate in the world economy and offer a more predictable environment for trade and foreign investment in accordance with WTO rules (WTO NEWS: 2001 PRESS RELEASES Press/243, 2001). Among these is the following commitment involving foreign financial institutions:

Upon accession, foreign financial institutions will be permitted to provide services in China without client restrictions for foreign currency business. For local currency business, within two years of accession, foreign financial institutions will be permitted to provide services to Chinese enterprises. Within five years of accession, foreign financial institutions will be permitted to provide services to all Chinese clients ( WTO NEWS: par. 5)

Establishing commitment affords a foreign agency equal right in the business environment of the host country--in this case, China to Citigroup. The commitment schedule is the guideline, which determines the market access and national treatment obligations. This is known as most-favored nation (MFN) treatment. It is a general obligation that applies to all measures affecting trade in services. Although, China has made certain commitments to open its market to foreign business, its environment is unique. Although China has met the criteria to accord national treatment to foreign companies--belief is that China is structurally unable to make it a reality. According to James Kynge, 1999, "In China's case, experience and discernable economic pressures suggest that the equal application of transparent laws enforced by an impartial legal system may remain a mere concept for many years to come.

Expansion Challenges

Citigroup had obtained a limited license to perform corporate banking services, before China received WTO membership. However, since the China's membership Citigroup wants to expand it presence in China. China has unique environmental challenges, which include:

1. Banking regulations, which require new branches to have a minimum of $72 million in operating capital. This is up from 15.7 million, in order to do local retail business.

2. Fear of Citigroup becoming a competitive threat to China's struggling domestic banks, could cause the Peoples Bank of China (PBOC) to stop Citigroup's China expansion plans. Giving early licenses to smaller foreign financial institutions could do this.

3. Current politics can cause economic failure--resulting in high unemployment--affecting expansion plans.

4. Citicorp must overcome human resource challenges. Customer service, marketing, and human resources in a free enterprise market economy are different from the perspective of a business structure under the communistic central planning strategy. The organization must ingrain these concepts in the managerial and labor ranks as well as the educational system.

5. Telecom infrastructure lacks broadband capacity except for a few cities. This is more an opportunity to enter China and revolutionize the telecom infrastructure.

6. Regional disparities where over 75 percent of information technology investment in China is concentrated in just three cities causes problems in regard to the economic development of the nation as a whole (David W. Conklin, Citigroup in Post WTO China, 2004, pg 36)

With all of the aforementioned challenges, Citigroup believed that China's membership to the WTO opened the way to tremendous opportunity for financing foreign-owned corporations. The question was what services should Citicorp offer and how should they be organized? (pg. 37)

Expansion Opportunities

With all of the challenges, Citicorp still saw opportunities. Foreign direct investment increased with the prospect of China joining the WTO Citicorp saw this as an opportunity to focus on providing foreign-owned corporations with certain of its services. The privatization of SOE was an opportunity for investment banking (pg. 37). Chinas insurance sector was expected to be one of the most lucrative and highly competitive over the next few decades (pg. 38). Citicorp saw this as unlimited growth potential for its Travelers Live and Annuity division (pg. 39). Finally,