The move comes after the U.S. bank revealed last week it would sell its retail banking assets in 13 markets, including mainland China.
Citigroup's applications to regulators are being finalised and should be officially lodged shortly, the source said.
The expanded investment banking unit could employ about 100 people, consisting of existing employees and new hires, by the time it is operational, the person added.
When contacted, a Citigroup spokesman declined to comment.
Citigroup's move reflects "the broad trend of China's opening up, and local brokerages are fully prepared for the foreign competition," said Zhu Feifei, analyst at Huafu Securities Co.
Zhu said that China represented a huge potential market for foreign players, but it would take time for them to win market share.
A local underwriting licence would allow Citigroup to participate in the fast-growing mainland Chinese IPO market, especially the STAR Board, which is dominated by local institutions.
There were $8.9 billion worth of IPOs on the main Shanghai Stock Exchange board, STAR Market and Shenzhen ChiNext in the first quarter of 2021, according to Refinitiv data.
Regulatory rules require lead underwriters for STAR IPOs to buy 2% to 5% of stock on sale and hold it for two years. This requirement has discouraged foreign institutions, as it ties up capital, leaving the market to be dominated by major Chinese banks.
Citigroup sold its stake in its Chinese joint venture with Orient Securities in 2019, paving the way for the U.S. bank to launch its own investment bank, as China opened up its brokerage sector.
The bank was given a domestic custody licence last year and already has licences to settle and underwrite bonds in mainland China.
(Additional reporting by Samuel Shen in Shanghai; Editing by Jacqueline Wong)
By Scott Murdoch