'The foreign banks lack the branches,' Bank of Shanghai's Jing Xiaosong said.

'They can't wait until the market is fully opened in five years. They have to move now.'

Seemingly buying into that logic is the world's largest financial firm, Citibank, which will reportedly take an 8 per cent stake in Pudong Development Bank - with an option to increase the holding to up to 12 per cent - in a transaction that neither party is yet calling a done deal.

'We have had discussions with all of the big international banks,' one Pudong Development Bank official said. 'This is a good thing. But we are not at the point where we are ready to make a disclosure.'

HSBC led the big commercial banks when it took an 8 per cent stake in the Bank of Shanghai in late December. It joined SAR-based Shanghai Commercial Bank with a 3 per cent stake and the International Finance Corporation (IFC), the investment arm of the World Bank, which owns 7 per cent.

Ironically, the commercial banks have followed in the footsteps of the IFC which took minority stakes in Minsheng Bank and the Nanjing Commercial Bank.

Trading in Shenzhen Development Bank shares was recently halted after a report that an 8.96 per cent block of shares was up for sale.

Foreign banks have shown little interest in the big four State-owned banks, with the exception of the listed offshore operations of the Bank of China.

The Agricultural Bank of China, the Industrial and Commercial Bank of China, the China Construction Bank and the domestic rump of the Bank of China remain bloated with bad loans and policy-lending commitments.

With less financial and political baggage, China's smaller banks are considered more attractive. They are generally younger and, therefore, not part of the central planning machine that encouraged lending to state firms - regardless of whether they could repay.

Local government officials are now helping their hometown banks line up prospective partners. One foreign banker recalls a surprise appearance of the head of a local commercial bank during a courtesy call on a senior local official. This appeared to be a government-sanctioned get-acquainted effort.

Officials and bankers alike seem fully cognisant of their negotiating strength with foreign players.

'They're looking for customers,' an executive at the Pudong Development Bank said. 'This is a short cut.'

Yet considering that majority control is not on offer and many small banks have a poor profit record, the business case for tie-ups remains unproven.

'They are getting a relationship,' financial consultant Stephen Harner said.

'As an investment you don't get a very useful return. You don't get control, but look at it from a distribution perspective. It is a way to distribute products.'

And here lies the basis for co-operation, since mainland banks need a broader range of product offerings to help them retain their best customers.

As home ownership increases, mortgage finance will be a key battleground, with foreign banks able to offer more sophisticated packages that may combine fixed and floating rates with insurance bundled into the deal. A likely outcome is for local banks to distribute foreign-branded product offerings through their branches.

Credit cards offer another source of growth. While local banks offer credit cards, a tie-up with a foreign bank could give local customers access to a global automated teller machine network.

'The local banks want to stay competitive in this segment of the market,' Mr Harner said.

'All are desperate to hold on to it.'

What is more, few foreign banks are committing serious money for a seat at the table. HSBC paid a less than budget-breaking 517 million yuan (about HK$484.58 million) for its stake in the Bank of Shanghai.

'Buying into the smaller banks doesn't require that much money,' an executive at the Industrial and Commercial Bank said.

'Assuming they were interested, it would take a lot more money to buy a stake in one of the big four.'

Another motivation for foreign banks is seeking a toe-hold in the local currency business with mainland firms. For now, they are restricted to dealing with foreign-invested companies and that limits their access to yuan.

How useful the ownership of minority stakes in small local banks will prove in skirting restrictions is unclear. The People's Bank of China is committed to phasing in restrictions on bilateral loans to foreign banks, limiting them to 40 per cent of local banks' liabilities.

Foreign banks have complained this violates the spirit of the WTO agreement and amounts to protectionism. The central bank maintains the measure was motivated by prudential banking considerations, although lobbying by local banks seems to have been a factor in the decision.

'It is discriminatory and it is an obstacle [to the foreign banks],' Fujian Industrial Bank's Liang Yong said.

'But they would be too strong without this.'

While that issue is of considerable concern to foreign banks, it is not likely to slow the search for local partners.

'The foreign banks will still see advantages in teaming up with local banks,' Mr Liang said.

Graphic: anal21gbz