Less competitive market

Some analysts said foreign banks might be turning to rural areas since it was difficult for them to compete with Chinese rivals in cities. Instead, they turned to the rural areas that domestic banks had largely abandoned.

China's rural market attracts foreign, domestic banks [CFP]

"They [the state banks] retreated from the rural market, creating a void, which was a good chance for foreign banks," Li Jing said.

Yin said foreign banks were implementing a long-term strategy by going into rural areas, which offered more room for growth than the competitive urban markets.

The HSBC source said the Chinese rural market was underdeveloped but was experiencing rapid growth. The bank saw tremendous potential in the rural market as the government stepped up agricultural reform and gave priority to rural development, the source said.

Some analysts said it was likely that foreign banks would experience setbacks and perhaps lose money in their rural ventures, as they were not familiar with the rural market and had few outlets.

The HSBC source said that initially, rural banks would not contribute to profits. But the bank looked to rural banking in China as a long-term business, he added. The bank forecast its business would be profitable in three years.

Standard Chartered Bank said its first micro-finance program in Xinjiang had provided loans at floating interest rates for more than 600 cotton farmers within a year and all the principal and interests had been collected by the end of 2008.

Yin said that in the long run, foreign banks would find rural lending to be as profitable as urban business because of their professionalism in risk control and credit management, as well as the country's reliance on the rural market for sustainable development.