Having been in the Chinese mainland for over 140 years, Standard Chartered Bank is busily looking for local partners to prepare for a new wave of development after 2006.

By then, overseas banks will be getting equal access to the vast Chinese mainland market - no customer or geographical restrictions will stand in their way.

But Kai S. Nargolwala knows that banks like Standard Chartered need to do more to get on an equal footing with local institutions.

Shortages of the local distribution networks, for example, is an area of major weakness.

"We have to look for a partnership with a local bank or more to be able to develop that distribution network," said Nargolwala, Standard Chartered's group executive director, who governs the bank in Asia.

When its operations in the Chinese mainland focus on wholesale banking, it will also look into specific sectors in retail banking after the Chinese mainland market entirely opens.

"It is not feasible to develop the local network by ones own," he said.

Therefore, the bank is in discussions with a number of the Chinese mainland institutions, Nargolwala said in an exclusive interview.

Possible forms of co-operation range from exclusive partnerships to specific strategic alliances in certain areas, such as credit cards and mortgage loans.

But it is still premature to talk about the exact details, Nargolwala said.

The bank is more interested in a partnership with smaller shareholding banks, partly because it is more likely to take a stake in a small bank rather than one of the big four State-owned banks.

China's banking regulator is expected to amend existing rules on foreign participation in domestic banks and give foreign institutions more impetus.

Liu Mingkang, chairman of the China Banking Regulatory Commission, said in August that the maximum ratio of holdings that a foreign institution will be able to control in a domestic bank under the new rules will be set at up to 25 per cent.

So far, the biggest ratio a single foreign shareholder owns in a domestic bank is 15 per cent-the International Financial Corp in the Nanjing City Commercial Bank.

Nargolwala said if Standard Chartered bought into a Chinese mainland bank, it would try to help the local partner improve its risk control, management and information disclosure.

A risk management capability ensures banks do not have problems with non-performing loans (NPL). Additionally, transparency will shoulder investor confidence.

Nargolwala said Chinese mainland banks should adopt international accounting and auditing standards.

They should also gradually remove State influence on their business so management is based purely on commercial operations.

However, the reform of the banking system has to go hand in glove with the reform of State-owned enterprises , which will take time, said Nargolwala.

After the market is open, foreign banks will base their decisions on financial considerations. Their shareholders will first check the expected return on equities and other economic benefits of the Chinese mainland banks before agreeing to any deals.

Therefore, "even if the changes (to the regulatory rules) are made soon, I don't see foreign banks rushing in to buy into Chinese mainland banks," said Nargolwala.

The evaluation of Chinese mainland banks is no easy proposition at the moment, since they have just started reform to become more professionalized. And that has to be put in the broader picture of the overall financial reform in China.

But regarding the prospect of such reform, Nargolwala said he is "extremely confident."

The Chinese officials know and have a full understanding of the problems the financial system faces and they have good expertise, he said.

Also, the reform is being conducted on the back of China's strong economy, which will continue to do well over the next couple of years, Nargolwala said.

The Chinese mainland has also agreed to follow World Trade Organization (WTO) stipulations faster than many other economies. It should not follow other economies' schedules for opening up, but keep its own pace.

However, Nargolwala said despite improvements, the authorities still need to amend a raft of regulations that do not conform to WTO rules.

On the other hand, it is a good sign that the government is reducing interference in banking loans and management.

With strong expertise in NPL disposals in Asia, Standard Chartered is also interested in the local asset management business - but has not closed any deals at this stage.

"We will be buying from Chinese mainland asset management companies," said Nargolwala.

It will be done through setting up local asset management companies, which is similar to the previous cases of foreign participation in the business in the Chinese mainland.

Negotiations are ongoing, he said.

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