Banking giants, their sights set on Chinese consumers hungry for house and car loans, are getting started in China by buying stakes in its smaller commercial banks -- and walking straight into a landscape of bad loans and financial scandals.
Reports that Hong Kong's biggest bank, the Hongkong and Shanghai Banking Corp, was considering taking a stake in Guangzhou Commercial Bank coincided with news that the Chinese bank has been embroiled in an expensive debacle over misuse of money.
More surprises could be in store as foreign banks hunt Chinese partners. Though the state-owned industry is clearing away a mountain of unpaid debts, the extent of individual banks' troubles is unknown. China requires little public disclosure of their finances and the entirely state-controlled media suppresses unflattering news.
China hopes such deals will bring in foreign money, technology and skills -- assets that its banks urgently need. The state-controlled China Daily warned recently that many smaller banks were "on the verge of bankruptcy."
Foreign banks, their business slow elsewhere, seem willing to take the risk, attracted by China's seemingly huge market and growing populace of urban consumers. Economic growth this year is projected at 8 percent.
"If there is something interesting and it looks attractive to us, we will take an interest," David Eldon, chairman of Hong Kong and Shanghai Bank, told reporters. He said HSBC wants more partners among small Chinese banks, though he asaid they ``do have some difficulties to deal with.''
China has promised as part of its WTO obligations to give foreign institutions the same treatment as Chinese banks by 2007.
To avoid the expense of setting up networks of thousands of branches, foreign financial firms are instead buying into smaller Chinese banks and brokerages.
That would give them access to China's 8.6 trillion yuan (US$1 trillion) pool of savings and markets for such things as credit cards and consumer loans.
"If they can't enter a market on their own, they can parlay the cooperative relationship with a local institution into a new business," said Nick Lardy, an economist at the Brookings Institution.
The smaller banks, often called city banks because they are affiliated with municipal governments, were created in the 1990s by merging credit cooperatives.
Though dwarfed by the 80 percent market share held by China's big state banks, they are prominent locally, with assets of 880 billion yuan (US$106 billion).