But perhaps the largest question is whether injecting capital and bringing in foreign investors will be enough to end poor risk management. The combined nonperforming loans of China’s four biggest state-owned banks dropped to 10.11% from 19.15% of total loans over the past 18 months, but the ratio still is high by Western standards. U.S. banks typically have nonperforming-loan ratios under 1%.
"Nobody knows how much of new loans will become nonperforming loans," says Fitch’s Mr. Marshall, adding that the effectiveness of China’s risk-management overhauls won’t be apparent until the banking system goes through a full credit cycle.
Foreign investors with a long-term focus on China, including HSBC and Citigroup Inc., are buying larger stakes in midsize banks in hopes they will eventually be able to take full control. But China’s willingness to allow foreign banks to call the shots at its domestic banks remains unclear.
For example, Citigroup is leading a consortium seeking an 85% stake in Guangdong Development Bank, with Citigroup taking a 40%-to-45% piece and control of the bank. The deal would require a special exception from regulators and usher in a new era of foreign ownership.
But a group headed by Société Générale SA, seeking to wrest the stake from the Citigroup consortium, is arguing that an exemption would encourage other foreign banks to ask for larger stakes. The French lender is making a last-minute plea to Beijing to accept its lower bid, noting it would remain under the current investment caps. A decision by China’s cabinet is expected by the end of the month.