Despite increasing funding constraints, foreign banks operating in China are still "surprisingly confident" about their prospects in the Chinese market. That's according to a report released by PricewaterhouseCoopers (PwC) International Ltd.

Of the 42 foreign banks interviewed by the company in China, 22 expect revenue to rise between 20 and 50 percent in 2011. And all the banks interviewed believe that their revenue will continue to grow over the next three years.

"Their optimism stems from the continued opening up of the Chinese economy, and its transition toward a convertible currency," said PwC.

The high confidence level belies the continued struggle of foreign banks in trying to gain a foothold in China. The 127 foreign players operating in the country commanded just 1.83 percent of the domestic banking market in 2010, only a slight increase from 1.7 percent the year before. However, the 42 foreign banks that participated in this year's survey made it very clear that their commitment to China remains resolute.

"The market share figure fails to reflect how foreign banks are continuing to redefine the market segments in China. They believe that China still offers exciting growth opportunities. And they're not wrong," said Raymond Yung, financial services leader for PwC China.

Yung said China's economy may not be expanding as rapidly as in recent years, but it's still growing at a faster rate than the banks' own home markets. And with the Chinese government taking steps to internationalize the yuan, more business opportunities will develop.

The debt capital markets continue to be viewed as the area that will offer the greatest opportunities in the future, said the report. China's bond market is now the second-largest in Asia, and the sixth-biggest in the world.

Michael Hu, financial services partner at PwC China, said the tightening of credit in China has left much a great deal of room for the development for bond market.

And more banks prefer to explore the market through acquisitions in complementary areas where permitted, such as trust companies, securities firms, and asset management, compared with 2009 and 2010.

Although optimistic about business opportunities in China, foreign banks are feeling the increasing weight of new regulations.

Coupled with tightening liquidity and rises in interest rates and reserve requirement ratios, the road ahead is expected to be challenging.

Three-quarters of the respondents said liquidity tightening had affected their lending, while the impact of the increase in reserve requirements has yet to be felt.

To soak up liquidity and curb inflation, the central bank has raised the reserve requirement six times since the beginning of the year and 12 times since the beginning of 2010. It has also raised interest rates four times since October.

In addition, some banks worry that it will be difficult to attract enough deposits after meeting the required loan-deposit ratio of 75 percent. Moreover, the new capital regulatory parameters, especially the 2.5 percent provision ratio, are expected to affect profit.

"There are certainly obstacles and some speed bumps to tackle. But in the current post-financial crisis climate, these challenges are not unexpected. Foreign banks are in China for the long haul. And the involvement of these international players is, and will continue to, pay dividends for the development of China's banking industry," said Hu.

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