AIMING HIGH: HSBC plans to set up its network expansion and services for rural banks in China (CFP)

Strong regulatory support for overseas banks was also cited in PwC's report as another reason for their recent successes in the country.

Last year, for example, financial authorities eased restrictions on overseas banks injecting capital into their Chinese branches, Hu Liang, a financial services assurance partner from PwC China, told the Global Times.

Last year marked the 10th anniversary of China's entry into the World Trade Organization. Gradual opening of the financial sector is a solemn commitment China made when it entered the WTO at the end of 2001, and the task is being carried out in earnest, said a report released by China Banking Regulatory Commission (CBRC).

The People's Bank of China announced in December 2003 that overseas banks were permitted to conduct domestic currency business with Chinese companies in four pilot cities, and the working capital requirements for overseas banks were reduced.

In December 2004 the CBRC allowed overseas banks to conduct local currency business in 18 Chinese cities.

In 2006, overseas banks were permitted to conduct currency transactions with Chinese firms and individuals on China's mainland.

According to PwC data, at the end of 2011, the overseas bank presence included 181 banks from 45 countries and regions. This included 37 locally incorporated banks from 14 countries and regions. CBRC data showed that overseas banks operated 245 branches, almost three times more than a decade ago.

Eye on the future

China has seen some dismal economic data lately, but far from being discouraged, the overseas banks surveyed say they remain more committed to China than ever, said the PwC report.

Most CEOs at overseas banks believe that the yuan's internationalization and interest rate liberalization will be the next development push, particularly for the debt capital market, structured products, interest rate swaps and cross-currency interest rate swap services.

The richer experiences of overseas banks in the foreign exchange swap business will further benefit cross-border trade financing growth, according to the report.

Since 2008, China has signed bilateral currency swap arrangements with South Korea, Mongolia, Viet Nam, Myanmar, Malaysia, Belarus, Indonesia, Argentina, Iceland and Singapore.

As China promotes the yuan's international use, overseas banks in the country, which have more access to the offshore yuan market, have won over domestic institutional investors as they moved to build global portfolios after the government fast-tracked approvals for new overseas investment plans, Nie Riming, a research fellow at the Shanghai Institute of Finance and Law, told the Global Times.

Standard Chartered opened its first onshore yuan trading account in Africa for South African metals trader Portland Steel in May 2011.

It also developed innovative trade settlement solutions to support clients' greater use of the yuan. All payments and collections for IKEA's yuan-settled merchandised transactions are now centralized in Hong Kong. It also put in place a financing solution for Daewoo International's yuan-settled exports to China, which enabled further expansion of trading volumes while carefully managing counterpart exposure and foreign exchange risk, according to the report released by Standard Chartered.

About 10 percent of China's trade was settled in yuan in the first quarter of 2012, and by 2015, HSBC expects this to rise to 50 percent.

According to Margaret Leung, Vice-Chairman and Chief Executive of Hang Seng Bank Ltd., at the end of 2011, it had over 70,000 commercial yuan accounts in Hong Kong, and yuan cross-border trade related business routed through the bank had increased.

China's transformation from an export-oriented to a domestic-demand driven economy will bring more diversified opportunities to overseas banks, said Mervyn Jacob, PwC's financial service leader for China and Hong Kong. Most of the banks interviewed will turn to newly emerging markets such as modern agriculture, information technology and eco-friendly energy, he added.

Challenges and risks

According to Wu Hong, Vice President of the China Banking Law Society, the road for overseas banks in China has not been entirely free of bumps. These banks have long struggled with attracting deposits from Chinese savers, which has kept the brakes on their lending activities as a result of the local regulator's 75 percent loan-to-debt ratio mandate. "This is a major concern for overseas banks, and one that has severely cut into their revenues," said Wu.

Wu explained that overseas banks' much smaller banking networks in China compared with their state-owned peers have become the major barrier in luring deposits from the Chinese people.

The Agriculture Bank of China, one of the major state-owned banks, has more than 24,000 outlets around the country, while HSBC China, claimed to have the largest service network of any overseas bank in China, boasted over 100 outlets in the mainland.

In terms of competition in outlet and scale, overseas banks have no chance to win out over local ones. Differentiation will be the viable way for overseas banks to compete with local ones, said the Securities Times.

On July 30, 2009, HSBC opened its first rural branch in Suizhou of central China's Hubei Province, becoming the first overseas bank to enter China's rural market.

Today, HSBC has set up 12 rural branches in eight provinces and formed a rural financial service network.

"The costs for setting up a rural bank are lower than setting up a branch bank in the city. HSBC will further step up its network expansion and services for rural banking," said Li Huiqian, Director of HSBC China's rural banking business.