"The impact of the rules on the foreign banks depends on their size," said Charlene Chu, a Beijing-based director at Fitch Ratings. "The larger ones are already sizable so there won't be too much operational cost added to them in terms of capital requirements."

HSBC, which has the largest foreign branch network on the mainland with 26 outlets, and its Hang Seng Bank unit plan to incorporate locally. Standard Chartered Plc, which makes two-thirds of its profit in Asia, also said it will.

"If you are into retail banking, if you are into personal financial services, asset management, you have to become locally incorporated," Michael Smith, HSBC's Asia chief executive officer and Hang Seng's chairman, said in September. "That's what the regulation is looking at, to provide protection for the individual."

Rules requiring foreign banks to incorporate locally are not unusual in other Asian countries such as Australia, Malaysia, Indonesia and Singapore. Still, China's new requirements may squeeze out smaller foreign lenders.

"Only those dedicated ones with strong personal financial services abroad will incorporate locally," said Orlando Wang, general manager of Rabobank Groep's China operations. The Dutch bank isn't likely to, as it targets corporate markets, he said.

Chinese lenders have improved their operations since the WTO agreement was signed, carving out bad loans, fixing internal controls and selling shares to the public.

Industrial & Commercial Bank of China Ltd, Bank of China Ltd, China Construction Bank Corp, and Bank of Communications Ltd raised more than US$40 billion from share sales since June 2005 as investors bet loan growth that averaged 14.5 percent in the past five years will be sustained.

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