Overseas lenders that don't incorporate locally must set aside two times as much capital, or 200 million yuan (US$25.4 million), as those that do, according to rules released November 15 on the Chinese central government's website. They also can't issue bank cards and can take only large deposits, limiting their ability to amass funds and grow through lending.

Song Dahan, deputy director of the Legislative Affairs Office of China's State Council, said the regulations will protect the interests of depositors, and give the same treatment to both Chinese and foreign-funded banks.

"Both Chinese and foreign-funded banks are required to be registered in China and locally incorporated so as to conduct the Renminbi service," he said on Thursday at a press conference in Beijing.

The regulations comply with the WTO rule, the principle of prudence and international common practice, he said.

The requirement to incorporate may be the biggest hurdle after December 11, when China removes all geographic and business restrictions on overseas banks to meet commitments made to join the World Trade Organization five years ago. Foreign banks are eager to offer loans, mortgages and credit-card services in the local currency to spur expansion in the US$5.1 trillion industry.

"HSBC welcomes the promulgation of the new regulations on foreign banks," said Richard Yorke, chief executive officer of HSBC Holdings Plc's unit in China. "It is a historic milestone to mark the fifth anniversary of China's entry into the WTO and its commitment to fully open the financial market."

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