Industrial and Commercial Bank of China earned a net profit of 84.6 billion yuan ($12.7 billion) in the first half of 2010. [Photo / Bloomberg]

BEIJING - Although Chinese banks may not earn as much money as they used to, international investors should still be optimistic about big returns, said a senior official at Moody's Analytics.

Elaine Wong, managing director and head of Professional Services Asia-Pacific at Moody's Analytics, told China Daily that despite the government soaking up excessive liquidity and planning to further tighten credit, new loans will still grow rapidly in the next year.

"The regulators just don't want things to grow too fast," she said, adding that more government restrictions have been added to improve credit quality and ensure that banks continue to lend to the right people, which will in turn benefit profitability.

Around 90 to 95 percent of capital among Chinese banks is credit-based. Considering a 9 to 10 percent GDP growth rate, and substantial credit growth to companies and individuals, the banks will report satisfactory returns in the future, said Wong.

In the first half of 2010, China's listed banks reported an average net profit increase of more than 30 percent. China Merchants Bank led the list with a growth rate of 80.56 percent, while Industrial and Commercial Bank of China gained most with net profit of 84.6 billion yuan ($12.7 billion).

Lu Zhengwei, chief economist with the Industrial Bank, said new loans in 2011 will not shrink by a large scale, as the recently ended Central Economic Work Conference emphasized the need for a "generally stable" and "appropriately regulated" monetary policy, while reaffirming the decision to shift the nation's monetary stance from "relatively loose" to "prudent" for 2011.

Lu predicted the government-targeted growth rate of M2, the broad measure for money supply that includes cash and all types of deposits, will be 16 percent in 2011, and new lending will be maintained at around 7 trillion yuan.

New credit from January to November this year had almost reached the 7.5 trillion yuan target set by the government, and is set to exceed that by the end of this month.

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Economists have blamed excessive market liquidity as a major factor in rising consumer inflation, which hit a 28-month high of 5.1 percent in November.

The government said liquidity will be "well managed" next year and "stabilizing overall price levels" will be a priority.

Internationally, more pressure will come to bear on banks as a new risk-management system under Basel III, an update of the recommendations on laws and regulations by the Basel Committee on Banking Supervision, is gradually implemented, said Moody's Wong.

"The pressure on general banking is not about adding more capital, but less profit because banks are doing less risky business and will be less attractive with lower returns. But those who invest on a long-term basis will like it."

Meanwhile, the risk management system Basel II (which preceded Basel III) will p  rovide stability for the Chinese banking system, and make China a stronger creditor and player in the international market. It will still be used as it has a different focus from Basel III, she said.

China has postponed implementation of Basel II until 2011, said the China Banking Regulatory Commission (CBRC) earlier.

However, CBRC Vice-Chairman Cai Esheng has urged banks to conform to the Basel III rules in a bid to improve international competitiveness.

"The CBRC is very serious about Basel III, as well as Basel II. They think it is an opportunity to make sure people are aware of the risks," Wong said, adding the good risk-management comes not from the Basel Accord, nor regulations from CBRC, but from the banks themselves.

China is becoming one of the biggest players in the international banking system, with four banks among the global top 10, but its banking system is still untested by any big financial crisis, said Wong.

Therefore, strict regulations and risk management are still needed to guarantee stability, even though the financial innovation process might be affected, she said.