Bank of China, the country's oldest bank, has remodeled its branch in Shanghai 's Lujiazui financial district with leather sofas, flat screen TVs and welcoming door attendants.

Competing head-on with domestic lenders promises to be bruising for overseas banks. To make up for their small branch networks, overseas banks have bought stakes in Chinese lenders and set up distribution partnerships.

Such partnerships were unthinkable when China began strengthening its financial system eight years ago.

The government has bought up US$400 billion of bad loans since 1998, and four of the country's five biggest lenders have held initial public offering s.

The banks are still overhauling their management and risk controls.

To date, overseas-domestic bank partnerships have been limited to selling foreign currency-based services such as mutual funds that invest abroad.

Starting today, they will be able to sell yuan-based funds. New rules require international banks to incorporate branches locally, subjecting them to regulations that limit lending to 75 percent of deposits.

Banks that don't comply must set aside twice as much capital and will be barred from taking small deposits or offering credit-based services.

1

2

(For more biz stories, please visit Industry Updates)