FOUR years ago big investments in China’s banks would not have been feasible. The banks were weighed down by hundreds of billions of dollars of bad debt, a legacy of the expenditure on modernising the country’s infrastructure. The sector was also engulfed in corruption scandals.

Today Royal Bank of Scotland joins the growing band of foreign investors taking stakes in one of China’s main banks. Others that have already committed money to the banking sector include Bank of America, HSBC and Temasek Holdings, the investment company of the Singapore Government.

The tide has turned since the authorities cleaned up the main banks through a capital injection of £40 billion in 2003 and the transfer of £144 billion of bad debt from the banks’ balance sheets to debt disposal companies.

The Beijing Government is also tackling corruption. Earlier this month, a suspended death sentence was handed to Liu Jinbao, a former senior official at Bank of China. The authorities claimed that he and several colleagues embezzled about £1 million, and approved illegal loans to a Shanghai property tycoon. Three other former executives were sentenced to between eight and 13 years in prison.

The stake-building by foreign investors comes just ahead of the expected flotations of China’s biggest banks. The Bank of Communications, believed to be the fifth biggest in China, floated successfully on the Hong Kong market this yeas. The bank’s shares rose by 13 per cent on the first day of trading, after the bank raised $1.88 billion from investors that included HSBC.

Others looking to take stakes in Chinese banks include UBS, Allianz and Goldman Sachs. All are hoping to get in at the start of what could prove to be a lucrative domestic market.

Despite China’s strong economic growth and potentially huge banking customer base, buying in to the banking sector is not for the faint-hearted.

Yesterday RBS shareholders breathed a sigh of relief that the investment has not been higher. Earlier this year it was rumoured that RBS was preparing to spend £2 billion to take a 10 per cent stake in Bank of China. Investors voted with their feet on the rumour, sending the price of RBS stock down. They feared that the bank could come unstuck. They were also keen that surplus cash would be returned to investors.

Yesterday the shares rose. Richard Schreuder, of Barclays Stockbrokers, said: “Although it is less obvious for a bank like RBS to take a stake in a Chinese bank than it is for HSBC, we do appreciate that RBS aims to benefit from Chinese economic growth.”