Despite difficulties faced in the past, foreign banks are finally making progress in China as commitment to the country returns to a pre-crisis level, reports PwC in their seventh Foreign Banks in China survey.

 

For the 181 foreign banks operating in China, profits more than doubled to 16.73 billion renminbi in 2011 while total assets increased 23.6% from the end of 2010 to 2.15 trillion renminbi the following year. Foreign banks, however, continue to have a low market share of less than 2% in 2011, noted Mervyn Jacob, partner and financial services leader, and William Yung, partner of consulting at  PwC Hong Kong and China.

 

Foreign banks are making profitable turns in China largely on the back of the growing internationalization of the renminbi which drives demand for derivative trading services among financial institutions and corporates such as multiple currency swap agreements. With a stronger overseas network, foreign banks will be able to play important roles in the pricing of renminbi products and facilitate the widening use of renminbi offshore.

 

Strong demand for credit among multinational corporations expanding in the Mainland was also noted as a key driver, as well as increased business from Chinese state-owned enterprises and private enterprises that favour foreign banks and their global networks as they expand offshore.

 

The majority of banks surveyed by PwC agreed that interest rate liberalization is a major opportunity for development and will have a positive effect in the long term as it will level the playing field for foreign and domestic banks. Foreign banks, with their innovation capabilities, are leading in the field of cash management, treasury management and trade settlement given the increasing demands for more sophisticated solutions from Chinese corporates.

 

“After years of developing in China, foreign banks have found their positions in serving Chinese customers, which will continue to drive their business growth and profitability in the country. Foreign banks will also be able to benefit from China’s economic transformation as it is now more becoming a market for high-end products,” added Yung.

 

Foreign banks are expecting continued strong growth in China until 2015 with the majority of banks seeing a revenue expansion of at least 20%.

 

The most critical challenges cited are tighter regulations and talent shortages in addition to rising competition from non-bank financial institutions.