BEIJING, April 29 -- China's banking regulator said it would place restrictions on foreign banks entering the local sector to help the country's lenders adjust to full competition, the Financial News reported Wednesday.

    Foreign banks would only be allowed to take stakes in at most two ¡°large-scale¡± local banks, said Shi Jiliang, vice chairman of the China Banking Regulatory Commission (CBRC), without elaborating.

    The restrictions were aimed at ¡°giving Chinese banks some time and space to prepare for full competition with foreign players,¡± the central bank-backed newspaper cited Shi as saying.

    ¡°We need to focus on having an appropriate level of protection for Chinese banks,¡± Shi said.

    In the three years since China joined the WTO in 2001, foreign banks had more than doubled their holdings of Chinese currency assets to 108.3 billion yuan (US$13.1 billion), Shi said.

    The CBRC would issue detailed rules governing the introduction of foreign strategic investors, he said, but didn¡¯t give a time frame.

    China would ¡°appropriately¡± control the speed of foreign banks' entry as well as the geographic areas that they can operate in, Shi said.

    But the rules would be in line with the framework of China's commitment to the World Trade Organization (WTO), he said.

    While China's regulators hope foreign investors can help improve poor corporate governance at local banks, they are also concerned about the country¡¯s underdeveloped banking system facing stiffer competition.

    One analyst said that while competition would increase after 2006, the threat might be overstated.

    ¡°Substantial competition can only occur once foreign banks buy very large domestic banks, but that's not going to happen any time soon in China,¡± said Citigroup analyst Yiping Huang.

    Currently, foreign banks can only buy up to 20 percent of a mainland lender.

    ¡°Even after 2006, competition will be in narrow areas, there won't be full scale competition for a long time. Not every bank can afford the capital to set up a bank branch. It¡¯s expensive,¡± he said.

    So far, nearly a dozen foreign institutions have acquired stakes in local banks. Among them, HSBC Holdings bought a 19.9 percent stake in Bank of Communications, China's fifth-largest lender, in August last year.

    Bank of China and China Construction Bank, two of the country's four major State-owned banks, are also in talks with potential foreign investors as part of a program to reform their bank structure.

    Earlier this year, Dutch conglomerate ING Groep NV signed a 1.78 billion yuan deal to buy a 19.9 percent stake in Bank of Beijing, one of the country's third-tier city commercial banks.

    Foreign banks were also paying more attention to smaller local banks with relatively sound management, the China Securities Journal reported, also citing Shi.

    The government would also encourage more foreign banks to invest in the poorer midwestern regions, not just the coastal and eastern areas, Shi said.

    (Source: Shenzhen Daily/Agencies)