China Construction Bank Corp has also indicated it will apply.

Bank of China is the only mainland lender with a US branch, set up in 1981 in New York to offer a full range of retail and corporate banking products and services.

Merchants Bank, which has a representative office in New York, applied to open a branch in the city in January. It will be the lender's second overseas branch after Hong Kong.

'It is an indication of mainland lenders' ambition to expand overseas. After all, the US is still a very lucrative market,' said Wu Yonggang, an analyst at Guotai Junan Securities.

Mr Wu said Merchants Bank's approval ahead of larger state-owned rivals was probably due to its better risk management.

'Merchants Bank has a better management structure and solid fundamentals. It is also more market-driven, which is a key to gaining international recognition,' he said.

The US Federal Reserve yesterday said the reason for giving the approval to Merchants Bank was mainland regulators' enhanced efforts to clamp down on money laundering.

'Based on all the facts on record, the board has determined that [Merchants Bank's] home country supervisory authority is actively working to establish arrangements for the consolidated supervision of [Merchants Bank],' the Fed's statement said.

'Its home jurisdiction standards to combat money laundering are consistent with approval under this standard.'

The Fed highlighted the progress made by the mainland banking watchdog in recent years to shore up the industry, namely the adoption of an anti-money-laundering law in 2005 and the two related rules enacted last year.

The mainland and the US have been urging each other to open their banking markets.

Lou Wenlong, a director of the China Banking Regulatory Commission's supervisory department, indicated yesterday that the mainland had no plans to raise the limit set for foreign investors buying into local banks.

Construction Bank, the country's second-biggest lender, last month called on US officials to intensify their efforts in allowing mainland lenders to open branches in the US.

'They need to be more open-minded towards us before we let foreign financial institutions expand in our domestic market to a greater extent, such as any possible stake increase,' Construction Bank president Jiang Shuqing said during the 17th National People's Congress.

China Minsheng Banking Corp, the country's first privately owned lender, last month agreed to take a 9.9 per cent stake in Nasdaq-listed UCBH Holdings, the holding firm for US-based United Commercial Bank.

It will be the first US purchase by the mainland private bank in an attempt to gain a foothold in the US market.