The proposed changes "certainly will add costs to foreign banks' China strategies," said Qiang Liao, a Beijing-based associate at Standard & Poor's Rating Services. The rules "might serve as China's latest effort to enhance the ability of domestic banks to compete with overseas rivals."

Foreign banks wishing to open a new outlet in China must first receive approval from the nation's banking regulator, which will issue its decision within six months of getting an application, according to the new rules. The overseas bank must then complete preparations to open the new outlet within six months of receiving permission from the China Banking Regulatory Commission, according to the rules.

The Chinese government, while preparing to open the market, is trying to bolster the ability of its own banks to cope with more competition. China has spent about US$400 billion on bailouts since 1998, according to Fitch Ratings' estimates, and four of the five largest have held initial public offerings to raise capital.

No 'Threat'

"Foreign banks don't post a significant threat to Chinese ones in the short term," said Zhang Jianguo, president of China Construction Bank Corp, in an interview in Beijing on Wednesday. "No matter how many overseas banks pour in as the market opens, they'll continue to lag behind Chinese banks in branch coverage and client base for the immediate future."

Foreign banks, which have more than doubled their profit in the country in the past five years, aim to tap the nation's US$2 trillion of household savings, partly through offering credit cards and asset-management services. They earned a combined US$446 million last year, compared with US$196 million in 2001.

Domestic banks still have far larger networks, according to figures from June 30. The 70,000 branches for China's four biggest state-owned lenders dwarf the 214 for overseas banks.

Under China's new rules, any overseas lender must have operated in the country for three years and been profitable for two straight years to offer services in the yuan currency. Banks that don't incorporate can't accept deposits less than 1 million yuan, limiting their reach to the mass market. Seventy-seven percent of urban Chinese households live on less than 25,000 yuan a year, according to a 2006 report by McKinsey & Co.

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