Advertisements for domestic and foreign banks in Beijing Financial Street. [Photo by Yu Zhiqiang/For China Daily]

China has loosened up market access for foreign banks that want to invest in domestic lenders.

Industry insiders expect policymakers will continue to open up the sector, after the country's top banking regulator issued a statement last week clarifying the rules on overseas bank investment.

The China Banking Regulatory Commission said "wholly-owned foreign lenders and Chinese and foreign joint ventures will be subject to the same regulations as overseas financial institutions" when it comes to investing in Chinese banks.

"Overall, foreign lenders may not necessarily act on the new policy in the short run, but its long-term impact can never be underestimated," said Fielding Chen Shiyuan, Asia economist at Bloomberg Intelligence in Hong Kong.

"What matters is the new regulation sends a strong message that Chinese policymakers will progress with opening up (the sector)," Chen added. "For foreign banks betting big on the long-term opportunities in Chinese mainland, they will get a head start."

According to the regulator's clarification, foreign banks in China will be able to purchase a stake in domestic lenders through their locally incorporated subsidiaries. Previously, investment in domestic banks could only be carried out by parent companies.

Still, the 20 percent maximum stake cap by a foreign bank remains unchanged.

She Minhua, a banking analyst at Zhong De Securities Co, felt the new rule could mean that the regulator intends to encourage more foreign banks to establish subsidiaries in China.

"One intention could be pushing the localization of foreign banks," he said. "By granting them greater rights, the regulator hopes that more investment by foreign lenders will help drive economic growth."

Investment through banking subsidiaries instead of parent companies will also make it easier for the regulator to monitor and manage capital flows, She stressed.

Analysts believe that smaller Chinese city banks and rural lenders will appeal to major foreign players looking to invest in the sector, such as HSBC and Standard Chartered.

They already have a wide network of businesses here and could take advantage of this policy clarification.

Zhang Xiaolei, president of Standard Chartered Bank in China, admitted the moves to open up the financial industry were "very encouraging" and said the bank will be doing specific business planning to take advantage of the new policies.

While the government has pledged to liberalize the sector, it remains highly restricted for foreign banks. They account for about 2 percent of the total assets of the industry.

By the end of 2015, there were 40 locally incorporated foreign lenders and one joint-venture, the Sino-German Bausparkasse Co Ltd, according to the annual report of the China Banking Regulatory Commission.

Dominic Wu Sze-yin, chairman of Asia Financial Risk Think Tank in Hong Kong, said foreign banks tend to take small stakes in Chinese lenders because of pressure from home regulators to reduce capital expenditure and debt ratios.

"Looking ahead, foreign banks will pay more attention to business collaboration with their Chinese counterparts," Wu said.

"Traditional business areas like retail and commercial banking may spell few opportunities, while private banking and asset management stand as the twin pillars of areas that generate high returns and woo foreign banks to invest in," he said.

Zhuang Qiange contributed to this story.

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