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Two years later, the government allowed foreign banks to conduct renminbi business for foreign enterprises and residents on a trial basis in the Shanghai Pudong area. Shenzhen, later in August 1998, joined Shanghai Pudong as the second trial city.

From 1994 to 1997, the number of foreign banks in China more than doubled to 175, while their assets quadrupled.

However, after the Asian financial crisis, foreign banks became more cautious in expanding their businesses in the Asia-Pacific region and their businesses in China also slowed down.

Several banks even retreated from the Chinese market. From 1998 to 2001, only 15 new operational foreign banking organizations were established in China.

WTO commitment

The country sped up opening the banking market after it joined the World Trade Organization (WTO) on December 11, 2001.

Upon the WTO entry, the new Regulations on the Administration of Foreign-funded Financial Institutions were published to replace the old law of 1994.

The new rules govern foreign financial institutions' operations of both foreign and local currencies and unify the application procedures for domestic and foreign banks planning to set up new operational establishments.

Also upon WTO entry, the experimental operations of foreign banks' local currency business in Shanghai and Shenzhen became official. Foreign banks in Tianjin and Dalian could also apply for a renminbi business license, which continued to be limited to foreign customers.

On December 1, 2003 and Jinan, Fuzhou, Chengdu and Chongqing joined as cities in which foreign banks are permitted to conduct local currency services.

On Aug 2004, the China Banking Regulatory Commission (CBRC), the banking supervisory body established in late 2003, published revised rules on the administration of foreign financial institutions, significantly reducing capital requirements for their local currency operations and simplifying entry requirements.

The capital requirements for foreign bank branches' corporate and retail renminbi business were reduced to 300 million yuan and 500 million yuan respectively from 400 million yuan and 600 million previously.

A key clause in the old rules which required foreign banks to open no more than one branch a year was also removed.

From December 1, 2004, foreign banks could enter five more cities to do renminbi business - Beijing, Kunming and Xiamen - in line with the WTO commitment, and Xi'an and Shenyang one year ahead of schedule.

Starting from December 2005, foreign banks were able to offer renminbi business in seven more cities.

Shantou and Ningbo were opened up in accordance with the nation's WTO commitments, while Harbin, Changchun, Lanzhou, Yinchuan and Nanning, which were not on the schedule, were also opened, bringing the total number of cities to 25.

In the five years following the WTO accession, the operational entities opened by foreign banks expanded from 190 to 312, despite of several merger cases.

But what really excited foreign banks was the full opening up of the banking sector in December 2006. As China promised, all the geographic and business restrictions were removed five years after its WTO entry.

The CBRC published new rules on the administration of foreign banks, which encouraged local incorporations for foreign banks that want to offer renminbi retail business to local residents under the principle of "prudential supervision".

After the official release of the new rules, several major banks rushed to hand in applications for local incorporation.

At the time, Katherine Tsang, CEO of Standard Chartered Bank China, told reporters proudly: "We submitted the application immediately early this morning."

The following year witnessed a rapid growth of foreign banks, either locally incorporated or as foreign bank branches.

A latest report of the central bank shows by the end of 2007, total assets of overseas banks stood at $171.46 billion, 47 percent up from a year earlier and accounting for 2.4 percent of total assets of all financial institutions in the country.

Outstanding loans of overseas banks stood at $95.16 billion, a year-on-year increase of 54.7 percent. Outstanding value of deposits increased 68.8 percent to $60.66 billion.

Equity investment

Foreign banks have been active in forging business and equity partnership with local banks, although a foreign institution can only own up to 20 percent of the equity of a Chinese bank, and the total ownership of foreign equity investors is restricted to 25 percent.

In the case of ICBC, a Goldman Sachs-led consortium including Allianz and American Express acquired a 10 percent stake for $3.8 billion in 2005 before ICBC went public.

But their interest has not only focused on the largest banks, but also on joint-stock commercial banks and selected city banks, like Citi's investment in Shanghai Pudong Development and ING's investment in Bank of Beijing.

Equity investment seems to be beneficial for both sides, with local banks getting capital and expertise they need during their changes and foreign banks gaining a stronger foothold in the Chinese market.