The quiet, windswept streets of Pudong New Area hardly seem the ideal place to locate a bank branch looking to finance investment and trade for Shanghai's foreign-invested companies, most of which have their headquarters across the Huangpu River in the city's centre. But that's what nine multinational banks have done - as they were required to do before receiving the People's Bank of China's (PBOC) first batch of local currency licences last year. 'It makes no sense to travel all the way to Pudong to open an account for a company based [across town] in Hongqiao district,' said John Beeman, country corporate officer for Citibank, one of the banks to move its headquarters. But he said the psychological boost of being licensed for local currency deposit-taking and lending far outweighed issues of convenience. Citibank is not alone in that belief. Hong Kong and Shanghai Banking Corp, Standard Chartered Bank, Bank of Tokyo-Mitsubishi, Daiichi Kangyo Bank, Sanwa Bank, the Industrial Bank of Japan, and the International Bank of Paris and Shanghai have all moved offices to accommodate their new status as pioneers of the mainland's increasingly commercialised financial sector. Others have followed and will continue to follow. Local currency licences are only a small act in a much larger shadow play unfolding between mainland leaders and multinational banks, which are plying the mainland. The banks aim not only to service their overseas clients who have opened mainland-based operations, but also have an eye toward competing in the local market. At the end of last year, there were 142 foreign bank branches operating in the mainland, with assets of about US$38 billion and outstanding loan portfolios of $27 billion. Though not inconsequential, such figures failed to account for the importance of foreign banking institutions to the mainland's recent economic growth, Daniel Conklin, Standard Chartered Shanghai branch manager, said. 'When you consider that more than 50 per cent of China's exports are manufactured by foreign-invested enterprises, it's important to remember that most of their funding comes from foreign banks.' Mr Conklin said the ability to engage in free-market local currency business remained a goal, but now represented only a small fraction of foreign bank trade. This was reflected by People's Bank statistics, which showed that at the end of March yuan assets for the nine banks totalled 916 million yuan (about HK$852 million), outstanding loans reached 591 million yuan, and outstanding deposits stood at 566 million yuan. The inability of these branches to grow expand currency business is due largely to the severe constraints imposed by the PBOC as part of the licence. For example, the banks can conduct business only in the Shanghai municipality itself, and they are allowed to compete for a customer base comprising only overseas nationals and foreign-invested and wholly owned companies. Beyond that, their local currency lending is circumscribed by the amount of local currency deposits the banks can attract. For Jethro Lau, Shanghai branch manager for Hong Kong and Shanghai Banking Corp, cultivating and developing a yuan deposit base is the number one priority for developing locally based business. That effort, he said, was progressing steadily, if slowly. The difficulty is most foreign bank customers are investment-heavy, revenue-thin manufacturing enterprises, or clients who would rather repatriate profits than convert them into local currency deposits. Nevertheless, business prospects are improving, and the days when Shanghai's foreign banks needed to dispatch bribe-wielding bag men to carry trade finance notes appears to be over. 'Most of us are making money here,' Mr Conklin said. He said revenue for the bank increased 22 per cent in the first quarter of the year. Mr Conklin said new business opportunities had emerged, particularly in the area of guaranteeing foreign clients who borrowed local currency from domestic banking institutions. The guarantee took the form of standby letters-of-credit, for which the bank received a fee. 'One of the positive things that has emerged is that there is more co-operation between local and foreign banks in prudently taking on challenges of risk,' Mr Conklin said. 'We can now break it up and spread the risk around.' The domestic banks, too, are beginning to repay such favours in kind by referring to their foreign counterparts mainland customers in need of overseas financial services. As far as future developments were concerned, Mr Conklin said 'nothing' had to happen. However, he said, there were some things the banks would like to happen. That included rule changes that would allow yuan-licensed foreign banks to enlarge their local currency base by accepting local certificates of deposit. The banks also were lobbying to expand their operating jurisdiction. That idea apparently had the support of the Shanghai branch of the PBOC, which earlier this year recommended Shanghai-licensed foreign banks be allowed to conduct business in nearby Jiangsu and Zhejiang provinces. Not all foreign banks agreed that was the right way to go. Speaking at the China Business Summit last month in Beijing, Chase Manhattan Bank's senior country officer Christian Murck labelled the granting of currency licences to selective foreign banks 'inconsequential and immaterial in the context of China's needs'. Speaking, not without a hint of self-interest, Mr Murck said: 'I believe a full [yuan] licence should be given to every foreign bank branch in China, allowing them to deal with local and foreign companies on the same basis as domestic banks. 'The result would be to add an element of competition that raises the professional level and liquidity of the market.'