Equity participation of foreign banks in Chinese banks should not exceed 25 percent even if they incorporate locally, said an official.

Wang Zhaoxing, assistant to chairman of the China Banking Regulatory Commission ( CBRC ), made the remark in Beijing  in an recent interview.

Under the Regulation on Administration of Foreign-funded Banks that took effect on Dec. 11, the Chinese government encourages foreign banks to incorporate locally and set up subsidiaries to minimize risks for Chinese customers.

If a foreign bank continued to run its Chinese operation as branches operated from overseas, the range of services it could offer customers would be limited.

Currently, a single foreign-funded institution can hold shares of a Chinese bank with ceiling of 20 percent and that for all foreign investors in a Chinese bank is 25 percent.

"Now the 25-percent up limit is still applied to foreign-funded banks that have been locally incorporated," Wang said.

Nine foreign banks have been approved to establish locally-incorporated banks so far.

"Those banks will receive national treatment, but they should still follow the 25-percent-limit rule when involved in merger and acquisition," he said.

To protect domestic small and medium-sized depositors who put money in foreign-funded banks in China, it's necessary for these local-incorporated banks to participate in the country's deposit insurance system, Wang said.