They've also sought out international lenders as strategic investors to draw in both money and management skills, maneuvering to control risks and improve their services.

"Local banks have done a lot," says May Yan, banking analyst at Moody's Investors Service in Hong Kong. "They were under the pressure of opening up the market. Now they are better financed and run on a more commercial basis."

Foreign banks are likely to speed up their expansion following the latest reforms, she says.

But plenty of hurdles remain.

Foreign banks dwarfed

The biggest may just be size. Although huge on a global scale, international banks are dwarfed by their Chinese rivals.

The biggest state-run commercial bank, Industrial and Commercial Bank of China has 18,000 branches and deposits totaling some $700 billion. The other big Chinese banks, although smaller, operate on a similarly grand scale.

Although service is slow -- waits of up to an hour for just a simple transaction are not uncommon, as clerks shuffle through piles of paperwork -- most customers are likely to stick to what they know rather than take the trouble to shift money to an unfamiliar foreign bank, says Pettis.

And while foreign banks theoretically have open access to the local market, WTO-sanctioned policies call for China to give them so-called "national treatment" similar to that given domestic banks, which are closely regulated in the first place.

Beijing recently issued rules requiring foreign banks to locally incorporate, establishing stand-alone China operations, in order to handle retail banking in local currency.

"A number of licensing regulatory restrictions and practices remain," noted the Moody's report.

Chinese regulators still limit foreign investments in local banks to below an aggregate of 25 percent of total equity in any one bank, with a cap of 20 percent of equity for any single foreign investor.

The only exception to that rule was won by a consortium led by Citigroup, America's largest banking institution, which last month got a green light allowed to acquire an 85.6 percent stake in Guangdong Development Bank, one of China's biggest regional financial institutions.

The $3 billion deal gives New York-based Citigroup a 20 percent stake in Guangdong Development Bank -- a move that will help the U.S. bank expand its operations in China.

"I think the foreign banks have a chance to grab some of the higher end retail and corporate business in the larger cities," says Yan of Moody's.

But she adds, "I think things are going to unfold more gradually. You won't see any major changes immediately."

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