Regulator says that a lifting of limits on overseas holdings will raise competition China's banking regulator may raise present limits on foreign ownership of domestic banks, according to a senior official quoted in state media. Li Fuan, vice-director of the policy and regulatory division of the China Banking Regulatory Commission (CBRC), said the move would raise local banks' competitiveness. 'I hope we can see the regulators move on this in the next year or two,' said Deutsche Bank economist Ma Jun. 'It will improve the market discipline of bank management.' At present, foreign investors may own a combined 25 per cent of a Chinese bank with individual investors limited to a 20 per cent share. The limit was raised in January last year from 20 per cent for total foreign investment and 15 per cent for individual stakes. Bank of America last week announced a US$3 billion acquisition of 9 per cent of China Construction Bank with the option to raise its stake to 19.9 per cent. Mr Li said the CBRC would also allow more foreign banks to operate individually in China and encourage domestic mergers and acquisitions by joint stock banks. He did not specify a new limit for foreign ownership. United States' ratings agency Moody's Investors Service yesterday announced a rating for China's banking system of 'stable to positive' in recognition of the government's resolve to reform the sector. 'It's probably more stable than positive,' said Meizhi Yan, the author of the report. 'Foreign investment and government recapitalisation reduces risk and is positive, but we are not ready to raise ratings on individual institutions until we see operational changes at the banks.' China's banks hold high levels of historical bad loans and there are fears that rocketing economic growth and irrational investment will mean loans now being made might go bad in the future. Mr Li acknowledged credit risk was still the biggest danger to the banking sector but said China had managed to bring the rate of non-performing loans in the system down to about 12 per cent from more than 30 per cent. Independent ratings agencies and economists estimate the proportion of bad loans probably peaked at more than 50 per cent of lending and put today's rate at between 25 per cent and 30 per cent. 'We see the situation in China somewhat differently and wouldn't weight the risk the same way as Mr Li,' Ms Yan said. At present, foreign banks are not allowed to conduct yuan business for local customers and are restricted geographically. Under China's WTO accession agreement, domestic banks will face direct foreign competition in all areas of business from December next year, although Ms Yan believes structural barriers will restrict foreign banks for some time after that.