CHINA'S opening of its banking industry will create a "win-win" result for domestic and foreign lenders but the dominance of Chinese banks may be difficult to challenge initially, Moody's said yesterday.

"The existence of foreign competition has pressured domestic banks to restructure and transform their operations," said May Yan, a Moody's analyst in Hong Kong, in a report.

"Meanwhile, foreign banks will gain market access to China's rapidly growing banking business."

China's State Council late on Wednesday issued rules to let foreign banks start yuan-denominated business for individual domestic clients next month.

But limitations were still in place as overseas lenders must incorporate locally with registered capital of one billion yuan (US$127 million), or be restricted to fixed-term deposits of at least one million yuan from Chinese citizens and only be allowed to lend 75 percent of deposits.

"It would be prudent to avoid 'too-fast' a change that could be disruptive to the banking system," said Yan. "Careful management of the pace of the opening up process is critical to the healthy development of China's banking system."

But Moody's also cautioned possible over-protection of the country's banking sector, noting "too-slow" a change could also be damaging to the system.

"Overprotecting domestic banks could stifle competition and disincentivize domestic banks from further reform, thereby hindering further strengthening of the banking system in the long run," the report said.

Moody's expects foreign banks to focus on the more affluent east coast areas and the high-end retail and corporate businesses.

Overseas lenders will "target to expand in debt capital markets, credit derivatives, structured products and risk management," said Yan, "On the retail side, they will seek to grow their local retail business in credit cards, mortgages and investment products."

But the retail areas where the Chinese banks traditionally have relationships, product strengths or network advantages would be difficult to challenge initially, Yan said.

Moody's said the opening up of banking systems in Asian nations usually followed a three stage process - bolstering domestic lenders via capital injections, allowing foreign players to participate but still placing limits and fully opening the sector.

Moody's said China was in the second stage.