Foreign banks in China, which largely sat out the lending binge created by the nation's giant stimulus package, might be facing their most difficult period for their business operation in the country.

Analysts said foreign banks in China with parent companies grappling with the ongoing global financial crisis were unable to compete with Chinese banks in funding major government-led projects. As a result they could see a significant decline in business revenue this year.

"The main clients of foreign banks in China are foreign companies, whose demand for loans has shrunk significantly in the current economic downturn," said Lian Ping, chief economist at Bank of Communications.

"On the other hand, major Chinese banks gained an upper hand in funding State-backed infrastructure projects, which are usually less risky than lending to companies and are not easily accessed by foreign lenders," he said.

The big four State-controlled banks, main lenders to the government-led 4-trillion yuan stimulus package, advanced 3.26 trillion yuan in new loans in the first half of this year, accounting for nearly half of the nation's entire lending in the period, while foreign banks are commonly believed to be at a disadvantage in making such lending because they lack government connections.

"Chinese banks have natural advantages in that there is a strong government inference that State companies should park their deposits and seek loans from State banks," an industry source at a Shanghai-based foreign bank said.

Foreign banks have rushed to extend their presence in the Chinese market since the nation fully opened up its banking industry in December 2006, but the unexpected global financial crisis, which badly hurt the banks' parent companies at home, has curbed their aggressive expansion spree in China.

Last year, foreign banks' total assets in China grew by just 13.2 percent, down 35.3 percentage points from a year earlier. Analysts said the situation could be even tougher this year.

"Some foreign banks in China are likely to lose customers to their Chinese rivals because they could not give out loans at favorable interest rates due to tightened liquidity and prudent lending practice," said Li Mingxu, an analyst at Anbound Consulting Firm.

"Away from the lending front, some companies have also started to shift their deposits to Chinese banks and more high-end individual customers are turning to Chinese banks for wealth management," Li said, adding such customer drift could be a short term phenomenon.

An earlier central bank report revealed that late last year, when the global financial crisis was in full swing, it was very difficult for foreign banks in China to get funds on the inter-bank market because of market concerns about the financial situation of their parent companies.

Major locally incorporated foreign banks HSBC (China) and Citibank (China) have declined to comment on their business operations this year, while Standard Chartered Bank (China) said it had not seen a major dent in its credit volume this year.

In contrast, analysts believed that Chinese banks could achieve decent growth for the whole of this year thanks to the lending spree in the first half, but remained vigilant on a possible bad loan surge next year.