Thirty-one out of 38 foreign banks with operations in China revealed in a survey that their expectations on the Shanghai Free Trade Zone (FTZ) have not been fulfilled over a year after its launch, according to Ernst & Young (EY).

EY's statistics show that there are 42 foreign banks operating in China. As of September 30 2014, 23 foreign banks have registered in the SFTZ while the survey indicated that others are adopting a wait-and-see attitude or have decided against setting up a presence inside the zone. Thirteen of the 38 foreign banks opted not to be in the FTZ, the survey shows.

High cost is one reason. "Regulators' requirements for a stand-alone system for conducting businesses inside the Shanghai FTZ give foreign banks pause," the accounting firm says. Participants in this report say that the cost of such a system could range from US$2 million to US$10 million, but cost-benefit considerations preclude making a viable business case to their respective head offices.

Product shortage is another reason, says Kelvin Leung, banking and capital markets leader, financial services, EY Greater China. Opportunities associated with "cash pooling" received frequent mention, although the list of products that can be offered in the FTZ remains unclear. But those surveyed also mentioned trade finance and cross-border loans as opportunities in the FTZ.

The survey also shows the challenges foreign banks are facing in China. In regulations, the top three challenges are access to the bond market, rules and regulations related to foreign banks and capital and liquidity constraints. In operations, the top three concerns are attracting and retaining skilled personnel, legal environment and good governance in client companies. In market, the top three challenges are attracting and retaining profitable retail customers, margin compression and domestic bank competition.

Looking forward, 50% of the surveyed foreign banks say they see slight increase of their businesses in China by 2017, 45% see significant increase while only 5% expect their operations to stay the same.