The majority of respondents predict 20 to 30 foreign banks will incorporate locally by 2010. But not all banks deciding to register as a local entity are aiming at retail business.

By the end of May, about eight banks including HSBC and Citi have established local entities, with most headquartered in Shanghai. A few more like JPMorgan have applied for the same.

Six banks that aim to develop retail banking business in China also plan to boost their retail customer base to over 100,000 by 2010. In terms of products, they will focus more on credit cards, investment products and mortgages.

A major challenge for foreign banks is staffing. The 40 banks together employ some 16,752 but this number is expected to grow to 35,685 by 2010, a whopping 113 percent rise.

"Many foreign banks are supporting their expansion in China by importing trained personnel from within their banks," said Raymond Yung, PwC's Financial Services Leader for China.

"There are already almost 3,000 expatriates working in the industry. Over the next three years, the banks surveyed plan to add another 639."

Another challenge is the regulatory environment. Many foreign banks remain critical of the regulatory issues, particularly in areas of coordination, consistency and clarity. They are also frustrated by the lack of credit history in China.