7.3 percent. Also, the solid growth in loan portfolios and improvement in risk management have contributed much to the decline.

A survey conducted jointly by the People's Bank of China and the National Bureau of Statistics in the first quarter of 2006 showed that 65.2 percent of commercial banks faced increasing loan demand compared with the quarter before, while only 7.6 percent of banks witnessed declining loan demand.

Merge or acquire for a better position

In China, the banking industry dominated the merger and acquisition scene, as foreign banks continued their march into the mainland. Foreign banks are positioning themselves to tap China's huge growth potential in the areas of credit cards, wealth management and insurance products.

In February, Singapore's state-owned investment fund Temasek Holdings acquired a 5 percent stake in BOC for $1.52 billion. The Singaporean firm had earlier, in July 2005, invested $1.47 billion for a 5.1 percent stake in CCB and bought a 4.55 percent stake in China Minsheng Banking Corp. in January 2005. A foreign trio comprising Goldman Sachs, American Express and Allianz paid $3.78 billion for a 10 percent stake in ICBC in January this year, forming a strategic alliance to assist the Chinese bank in its financial reforms.

Retail banking opportunities abound

According to a survey by Accenture, a global management consulting, technology service and outsourcing company, banks in Asia-Pacific are highly optimistic about the future growth prospects of retail banking, with nearly two thirds expecting annual growth in excess of 10 percent over the next three to five years.

Due to the region's vast population, combined with dynamic economic growth and high saving rates, many banks have built up their retail lending portfolios aggressively and are diversifying their revenue streams. With income levels rapidly rising, many new borrowers are able to afford mortgage loans, auto loans and credit cards, and Asian banks are seizing the opportunity. Many have enhanced their services to cater to their retail consumers and have strengthened their infrastructure in terms of technology and their branches, and are learning more about consumer behavior to sharpen their retail banking capabilities.

In China, which is currently attracting the interest of global banks, the growth in bank deposits creates huge opportunities for retail banking, ranging from mortgage lending to bancassurance and wealth management. Mortgage lending and auto loans account for 77 percent and 6 percent, respectively, of consumer loans in China.

According to management consulting firm McKinsey & Co, as incomes rose in the world's fastest-growing major economy, the number of credit cards issued in China surged 13-fold to 40 million in the past two years. To grab a large slice of this tremendous credit market growth, Chinese banks are waiving annual fees for credit cards, offering high credit limits and gifts. All mainland banks have joined in the race, some working together with foreign banks and finance companies and others opting to fight it out alone. For banks, grabbing market share is the first step in building their credit card business. New York-based Citigroup and partner Shanghai Pudong Development Bank began offering co-branded credit cards in Shanghai in February 2004 and have since expanded to 10 cities. Shenzhen-based China Merchants Bank currently holds the largest credit card share, issuing more than 5 million dual-currency credit cards since 2002.

Outlook

In the coming new year, the Chinese banking sector is expected to face more diversified difficulties and challenges.

Over the long term, domestic banks should fully realize the importance of increasing competitiveness and gradually become involved in insurance, securities and other financial services. New laws will allow business operations of domestic banks, insurance companies and securities companies to be mixed, which can further broaden the scope of banks' business.

This year, company loans remain major income sources of domestic banks, as banks are more willing to lend to small and medium-sized companies. Domestic banks are still paying taxes including a 5 percent business tax and income taxes on loan interest and commission. Gradually reducing and even eliminating these taxes will further promote the development of domestic banks.

(Xinhua Finance)

DISCLAIMER: The information contained herein is based on sources we believe to be reliable, is provided for informational purposes only, and no representation is made that it is accurate or complete. This briefing should not be construed as legal, tax, investment, financial or other advice, and is not a recommendation, offer or solicitation to buy or sell any securities whatsoever.