Standard Chartered intends to buy into China's Bohai Bank, a private lender in the northern coastal city of Tianjin.

The UK-based bank has signed a framework agreement with Bohai Bank to take a 19.99 per cent stake, it told investors in London last Friday.

But the purchase still has to obtain approval from China's banking regulators and the State Council, sources with Standard Chartered said yesterday. Further details were not revealed.

The move marks a concrete first step by Standard Chartered, whose business is focused on Asia, to buy into a mainland lender. This would enhance its presence in the Chinese market and expand its local network and resources, analysts said.

China allows a foreign bank to control as much as a 20 per cent stake in a domestic bank.

Senior officials with China Banking Regulatory Commission Regulators said that private investors are encouraged to invest in small and medium-sized banks. They even require that new banks must have a foreign strategic investor as an initiator.

Bohai Bank was approved for preparation at the end of last year, and obtained a national licence in spite of its small size. But it has not formally opened business.

Insiders said the new bank has better asset quality and no historic burdens, which makes it more appealing to Standard Chartered.

Before Standard Chartered's move, a number of foreign banks had already taken action to speed up investments in China to tap into the fast growing market.

Early this month, the Commonwealth Bank of Australia secured approval to buy an 11 per cent share in Jinan City Bank of East China's Shandong Province.

UK-based HSBC also signed a deal with Shanghai-based Bank of Communications in August to buy a 19.9 per cent stake in the Chinese bank with an investment of about 14.46 billion yuan (US$1.75 billion), then the biggest single foreign investment in the business.

Hong Kong's Hang Seng Bank also announced the acquisition of a 15.98 per cent stake in the Industrial Bank of East China in Fujian Province at the end of 2003.

And United States-based Citibank has bought a 4.62 per cent stake in Shanghai Pudong Development Bank.

Small and medium-sized Chinese banks are the prime target for foreign banks to invest in, analysts said.

These banks, with more vitality and flexibility and smaller size, offer foreign banks more opportunity for control and normally their asset quality is better, said an analyst with China Securities Co in Beijing.