Analysts described the move as inevitable as small banks would struggle to survive on their own now that China has entered the World Trade Organization.

Seventeen commercial city banks and urban credit cooperatives from East China's Jiangsu, Shandong and Anhui provinces and Central China's Henan Province plan to merge themselves to create the Huaihai Bank.

Lu Minfeng, an initiator of the plan, said the process to construct the giant bank would be completed within four years.

"Cross-region reorganization is one of the practical ways for smaller commercial banks to survive fierce competition with foreign commercial banks, which are penetrating deeper into the Chinese market," said Lu, who is chairman of Huai'an City Commercial Bank, one of the 17 commercial banks involved in the proposed merger.

In September, Newbridge Capital - a private equity fund based in the United States - received approval from the Chinese Government to become a strategic investor in the Shenzhen Development Bank.

And the same month saw the International Finance Corporation (IFC) - the World Bank's private sector financing arm - and Canada's Bank of Nova Scotia sign a framework deal to invest in the small Xi'an City Commercial Bank of Northwest China's Shaanxi Province.

Other banks with foreign shareholders holding minority stakes of up to 15 percent include the Bank of Shanghai, Nanjing City Commercial Bank and China Everbright Bank.

The Bank of Communications, China's fifth largest commercial bank, is also talking with overseas financial conglomerates to forge a strategic alliance through a stake transfer.

"We have met twice to discuss the merger plan and we believe the marriage is urgent," Lu said.

The merger could take place in two steps. The first would be to reorganize eight major banks that have larger assets and relatively higher profits into the Huaihai Bank, and then form an expanded Huaihai Bank through mergers and acquisitions.

The initial reorganization would include Huai'an City Commericial Bank, Xuzhou City Commercial Bank, Zaozhuang Unrban Credit Co-operative, and Zhoukou Urban Credit Co-operative.

The remoulding of the 17 banks would lead to a large Huaihai Bank with 50 billion yuan (US$6 billion) in assets.

(China Daily November 19, 2002)