The past few months have been incredibly busy ones for officials at the Suzhou City Commercial Bank in terms of receiving foreign bankers.

Ren Peihua, director of the bank's general office, noted that eight foreign banks, including financial giants Morgan Stanley and BNP Paribas, "have come to visit us since the second half of last year."

"Some came do more than to look around and get an initial impression of our bank. They conducted thorough research and brought very detailed proposals with them."

A report issued last May, which "clearly showed the value and great growth potential" of the bank was one of the reasons for the growing number of foreign visitors, remarked Ren.

The report revealed that Suzhou City Commercial Bank had total assets of 12 billion yuan (US$1.45 billion), and the bank's non-performing loan ratio had dropped to 2.3 percent.

But the foreign guests' plans were turned down, as "currently we have no plan to expand the shareholding or introduce foreign investors," said Ren.

"We may reconsider this in the second half of this year."

Suzhou City Commercial Bank is not the only city commercial bank in prosperous eastern China to receive frequent visits from foreign bankers.

Four groups of high-ranking officials from foreign banks, including BNP Paribas, the Australia and New Zealand Banking Group Ltd, Singapore's Overseas-Chinese Banking Corp Ltd and the Commonwealth Bank of Australia, crossed the threshold of Ningbo Commercial Bank in Zheijiang Province late last year.

Restructuring over the past year has resulted in a reduction of the Ningbo Commercial Bank's non-performing ratio to less than 1 percent. But there remains a need for the bank to introduce foreign investment, according to Yang Chen, secretary to the bank's board.

Yang said that work to introduce foreign investors will begin in May.

Some city commercial banks in this developed region are already one step ahead of their competitors. Hangzhou City Commercial Bank began talks last year with foreign banks including the Commonwealth Bank of Australia. Wenzhou City Commercial Bank issued a notice last October to increase capital adequacy by introducing more investors, including foreign banks. "We have talked with some foreign investors," said an anonymous bank official, who refused to elaborate.

Also in the spotlight is the Bank of Beijing, formerly known as the Beijing City Commercial Bank. The bank signed an agreement last month with International Netherlands Group Bank (ING), and inked a preliminary agreement with International Finance Corporation (IFC). ING invested 1.78 billion yuan (US$214.9 million) for a 19.9-percent stake, and IFC will take 5 percent. They will hold a combined stake of 24.9 percent in the Bank of Beijing, close to the regulatory limit.

Bank of Beijing President Yan Bingzhu announced at the signing ceremony that two ING officials will sit on the bank's board.

Analysts expect Asia to become the next battlefield for the world's leading banks, as US and European lenders find it increasingly difficult to increase profits in their home markets. China, with its fast-growing household saving and further opening banking sector, is becoming an increasingly attractive prospect.

Wei Jianing, vice-director of the macroeconomic department of the State Council Development Research Centre, pointed out that foreign banks - especially from the United States and Europe - are not only investing in eastern China, but also turning their attention to western and central regions of the country.

Although China's city commercial banks are smaller in scale than the "big four" state-owned commercial banks and some national commercial banks like the China Merchants Bank, and have limited branch networks confined to their respective cities, they offer plenty of opportunities.

Foreign banks can enjoy a bigger say for a lower investment in the city commercial banks, Wei said on the sidelines of last month's 2005 Financial Conference in Beijing.

And it is possible that some city commercial banks, if they have developed enough, may expand their branches to neighbouring cities and provinces, or even nationwide.

Taking the lead

Foreign banks' interest in China's city commercial banks dates back to 1999, when IFC took a 5-per-cent stake in the Bank of Shanghai. This bank later introduced a second batch of foreign investors, HSBC with an 8-per-cent stake and Shanghai Commercial Bank of Hong Kong with a 3-per-cent share, at the end of 2001.

Towards the end of 2001, IFC upped its stake in the Bank of Shanghai to 7 percent.

At the same time, it purchased a 15 percent stake in the Nanjing City Commercial Bank for US$27 million. Jinan City Commercial Bank and the Xi'an City Commercial Bank are among the other city level lenders that have introduced foreign investment.

The corporate quality of China's city commercial banks has greatly improved as a result of foreign investment, said Xia Bin, director of the Financial Research Centre of the State Council Development Research Centre.

The Bank of Shanghai is a good example of this phenomenon. Since the introduction of foreign investment, it has greatly improved its internal risk controls and management, and upgraded its technology, helping it become China's top city commercial bank.

Only for locals?

With their business developing fast, some city commercial banks want to expand their networks. The Bank of Shanghai is applying to take the Yangtze River Delta into its coverage.

The China Banking Regulatory Commission, the industry watchdog, released a guideline last November, encouraging China's city commercial banks to develop through internal restructuring, alliances, mergers and expansion beyond their locality.

Some analysts say city commercial banks must expand and secure a greater market share, otherwise China's financial reform will be their doom.

City commercial banks could find themselves squeezed out of the market by the rapid development of the State commercial banks and joint-stock national commercial banks, and local rural credit co-operatives also trying to catch up.

Although some city commercial banks are enjoying the good times, some are still fighting against low capital adequacy and high NPL ratios - historic legacies from when these banks were first established in 1996 by the merger of city credit co-operatives and community financial service centres.

According to official statistics, China's 112 city commercial banks had combined total assets of 1.5 trillion yuan (US$181 billion) by the end of last June, with an average capital adequacy ratio of 6.79 percent.

Under such circumstances, "city commercial banks must attract more investment, and local city governments - who are the majority shareholders - must allow them to merge or form alliances," urged Xia.

"The banking regulator should encourage city commercial banks to make more profits by every possible means, including going public and doing business in other cities."

"Forming alliances and doing business in other cities may not be a bad idea," said Zhu Guisheng, president of the Zhuzhou City Commercial Bank in Central China's Hunan Province. His bank is establishing an alliance with the nearby Changsha and Xiangtan city commercial banks to boost its market share.

But some bank officials and analysts say a good bank is not necessarily a big bank.

China does not lack big commercial banks, but what the country needs is banks that really serve numerous small-and medium-sized enterprises (SMEs) experiencing great difficulties in financing their projects, they argue.

"With a market share of 11 percent in the city, we want to better serve local small businesses," said Fang Deming, vice-president of the Huzhou City Commercial Bank in east China's Zhejiang Province.

As city commercial banks know the needs of local residents and enterprises, they should make the best use of this and become banks for local communities and SMEs.

"Expansion in other cities should not become a trend for the time being, or even in the longer term," Dang Junzhang, president of the Lanzhou City Commercial Bank, warned in a keynote speech delivered during the 2005 Financial Conference.

(China Daily April 4, 2005)