Foreign banks have rushed to invest in their Chinese counterparts

Deutsche Bank has acquired a 9.9% stake while fellow German bank Sal Oppenheim has taken a 4.1% stake in Huaxia, one of China's smaller listed banks.

Huaxia said the deal would lead to co-operation in a number of areas.

HSBC, Bank of America, ING and Royal Bank of Scotland have all bought into China's burgeoning banking sector.

Investment rush

The Chinese government has encouraged foreign investment in the sector, which in the past been has been held back by poor lending and frequent corruption.

Huaxia Bank is the fourth largest of five Chinese banks publicly traded on its mainland markets.

Apart from Huaxia, there are few targets left for Deutsche to consider Yu Yonggang, Guotai Junan Securities

The deal represents Deutsche's first investment in a Chinese retail bank, although it already controls a 20% stake in the Shenzen-based Harvest Fund Management.

Deutsche and Huaxia are expected to launch a co-branded credit card next year.

Huaxia said the deal would enable it to bring its commercial banking operations and products up to international standards.

"This will further increase Huaxia's competitiveness in the market, and speed up the pace of our overall development," said Wu Jian, the bank's president.

Deutsche Bank said the tie-up would enable it to participate in the development of China's financial services market.

"This is a dynamic market, with rapidly growing consumer affluence and significantly increasing financial sophistication," said Rainer Neske, a member of the bank's group executive committee.

Foreign limits

Foreign investment is providing Chinese banks with much-needed capital and expertise as they look to expand their services.

Foreign firms are currently limited to owning 25% of Chinese banks although these restrictions will be relaxed in 2006 as part of reforms tied to China's entry into the World Trade Organisation.

Analysts said the deal was on the expensive side.

"The price would have been lower if Deutsche hadn't rushed to invest in China," Yu Yonggang, an analyst at Guotai Junan Securities, told Reuters.