Prospects brighter for foreign banks in China

The Chinese government is taking steps to ensure there is no financial crisis of the kind that could be caused by unchecked growth in bad loans. But it is doing so cautiously, aware that curbing credit too much could hurt economic growth.

Data released recently suggest credit is stabilizing and banks are lending again. New loans in March rose to 1.05 trillion yuan from 645 billion yuan in February.

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"Investors got quite bearish after the release of the February data," say Bank of America Merrill Lynch economists Lu Ting and Zhi Xiaojia in a note. "March's rebound tells us that there was neither an intended nor unintended credit squeeze."

Even in the slower growth environment in which China finds itself, the economy is expanding faster than just about anywhere else in the world. And the fuel of this economic growth is capital, often in the form of lending. So the country's largest banks continue to grow at home and to expand internationally.

Over the past few weeks, the biggest banks in China reported strong profits through 2013.

The largest bank by assets, Industrial and Commercial Bank of China saw profits rise 10 percent for the year to 263 billion yuan, strong results but much slower than the 15 percent growth in 2012 and the slowest rate of growth since 2006.

The second-largest lender, China Construction Bank, saw its profits rise 11 percent. Bank of China says profits rose 12 percent and Agricultural Bank of China says profits rose 15 percent last year.

For the foreseeable future, the prospects for the banking industry in China appear to be good.

Positive prospects

In a report in early April, rating agency Standard & Poor's says that a "prolonged crisis is unlikely" and that ongoing economic growth, which is likely to stay above 7 percent until at least 2016 will "limit the systemic risk for Chinese banks".

This should also be good news for foreign banks that are looking to China for ongoing growth.

HSBC, which has 160 outlets in 52 cities in China and 30 branches in Beijing alone, expects much from the China market. Much of the bank's growth there is likely to come from financing deals like issuing yuan-denominated bonds.

In a presentation to investors in March, bank executives note that the yuan is now the second most-used currency in trade finance and that by next year, about 30 percent of China's trade, or $2 trillion, will be settled in yuan.

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