Foreign banks in China grapple with asset quality stress, regulation fluctuations

Their assets make up 1.3% of the system as of H1 2023.

Foreign banks in China will see continuous pressure in their asset quality amidst ongoing stress from local real estate and changes to the regulatory environment, according to Fitch Ratings.

Foreign banks’ assets make up 1.3% of the system assets in China as of the first half of 2023.

“We believe the banks’ performance and prospects remain highly sensitive to changes in China’s regulatory environment and that the ratings of Fitch-rated foreign banks in China will remain driven by our expectation of shareholder support,” Peiyi Zhang, Fitch analyst for financial institutions - banks, wrote in a commentary.

One advantage of these foreign entities is that their parents' banks are shouldering impairments related to mainland China-linked exposures.

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“Furthermore, the banks have always maintained higher capital ratios than domestic banks in China, in part due to their differentiated strategies that also lead to different risk profiles,” Zhang added. 

Changes over the past decade have further reduced the regulatory burden and entry barriers for foreign banks. However, most still face hurdles, such as licence requirements and cross-border capital flow limitations.