Citi to reorganize China private banking, shut unit

SHANGHAI/HONG KONG (Reuters) - Citigroup Inc (C.N) will close its private banking unit in China, which targeted the country's growing ranks of millionaires, and fold the operations into its consumer banking arm as it streamlines its businesses, sources familiar with the situation said on Tuesday.

Citigroup declined to comment on the restructuring plan but said it would continue to offer private banking services. "Citi remains entirely committed to the private banking space in China, and we will continue to invest in it," it said in a statement.

Several dozen employees at the three-year-old private banking unit will be transferred to other positions inside the bank, including the consumer banking business, said the sources, who declined to be identified as they were not authorized to speak to the media.

The unit's closure comes as the New York-based lender, the third-largest U.S. bank by assets, is close to selling a stake in its Smith Barney retail brokerage business to Morgan Stanley (MS.N), aiming to shore up its balance sheet.

Both its private bank and Smith Barney are under Citigroup's wealth management group.

Citigroup's private banking businesses elsewhere in Asia, including Hong Kong and Singapore, are operating normally and it is unclear whether the decision to close the China operation would herald similar restructuring elsewhere, said the sources.

RUSH FOR WEALTH

Lenders including HSBC Holdings Plc (HSBA.L), Standard Chartered Plc (STAN.L), Bank of China (3988.HK) and Bank of Communications (3328.HK), rushed to launch private banking services in China in recent years, jostling for business from a growing wealthy class created by the once-booming economy.

Operations faced an acute shortage of experienced private bankers, in a country where such services were almost unheard of three years ago, and struggled with high rates of staff turnover.

Client managers-turned-private bankers found the business required more than just playing golf with wealthy clients, while overseas-trained private bankers faced challenges including stringent capital controls, a limited range of products and the lack of a mature set of rules governing the industry.

Citigroup started private banking in China in 2006, targeting wealthy Chinese with net worth of at least $10 million, a typical threshold for such services globally.

Although private banking's prospects remain bright in China, with HSBC forecasting a population of 16 million high net-worth individuals in China by 2011 with $6.2 trillion in total assets, foreign banks face tough hurdles.

"Private banking services are constrained by a scarcity of outlets and a limited number of financial tools," said Wang Jing, head of private banking at China Merchants Bank (600036.SS).

"Business models transplanted from overseas may not work in China."

Citigroup's global private banking clients have access to a wide range of risk management and hedging instruments, including interest-rate swaps, options, structured notes and warrants, according to the company's website.

But many such derivatives are not available in China's underdeveloped financial markets, spurring many mainland Chinese to go to Hong Kong for private banking services.

(Editing by Edmund Klamann and Anshuman Daga)