The severe restrictions Beijing has imposed on foreign banks' operations are often assumed to be the key barriers to their business expansion. The assumption is not invalid. Only nine foreign banks in Shanghai are allowed to carry out local-currency business in Pudong, but their licences come with serious constraints: they cannot collect yuan deposits from or make yuan loans to mainlanders. Their clients are restricted to foreign-funded companies in Shanghai. Many have bitterly complained behind closed doors about the restrictions - although they will not admit in public for fear of offending the authorities. The remaining foreign banks must contend with traditional business such as project financing, syndicated loan arrangements and international trade settlements. The pie is small - although growing - and the competition keen. Yet, there is no shortage of foreign banks queueing up for approvals to expand in the city. The rationale is: 'The sooner you get in, the better your chances of carving out a share of the market when it finally opens up.' No doubt foreign banks would do much better if restrictions were removed to create a level playing field. Beijing has been slow to open its banking sector for fears that domestic banks would not be able to compete head-on with the more advanced foreign banks. The fears may be valid but somewhat exaggerated. True, foreign banks tend to be more competitive and innovative and could take customers away from domestic banks if the sector were fully liberalised. Yet, what is often forgotten is domestic banks have certain advantages foreign banks lack - such as the loyalty of their clients. In a survey of 200 companies in Shanghai, accounting firm Price Waterhouse found 136 companies - or 68 per cent - did not use the services of foreign banks. Of these 136 companies, 63 per cent said they did not intend to use foreign banks even if they were allowed to carry out yuan business. Most indicated they had no intention of using foreign banks in the near future. 'The findings are a bit of a surprise to me,' Price Waterhouse China market research manager Xiao Ying said. Why? Because the conventional theory is foreign banks cannot attract more mainland customers as they do not have yuan licences. 'We feel it is important for foreign banks to know that many [mainland] companies choose to use China state banks not because foreign banks cannot do business in yuan,' Price Waterhouse said. For the nine banks allowed to do yuan business, there is no doubt they would attract more mainland customers if restrictions on clientele were lifted. But that does not detract from the survey findings that mainland companies are more comfortable and familiar with state banks than with foreign ones. While foreign banks are recent arrivals, state banks have served domestic customers over a long period and are familiar with their needs. 'To gain more customers, foreign banks must make significant efforts to help their potential customers learn about their business operations in China,' the accounting firm said.