China Merchants Bank five years ago rejected an offer from Citigroup to help develop China's first dual-currency credit card. Today, it is China's biggest card issuer, with five million users.

In 2001, when China pledged to open its banking market by this year, analysts said the country's technically insolvent banks presented little competition for overseas rivals.

After a US$400 billion (HK$3.12 trillion) government bailout and US$44 billion of share sales, China's banks are profitable, growing and confident they can fend off lenders such as Citigroup and HSBC Holdings (0005).

"Five years ago, this was the last thing anyone, including me, expected to happen," says Sebastian De Bont, of the Robeco Group in Rotterdam. "We see many improvements."

China's consumer banking market opens to international lenders today, putting the country's 15.6 trillion yuan (HK$15.48 trillion) in savings deposits up for grabs. Earnings for Chinese banks totaled 257.3 billion yuan last year, up 11-fold from 2001.

"Foreign banks don't pose a significant threat to Chinese ones," says Zhang Jianguo, president of China Construction Bank , the country's fourth- largest lender.

"What China's banking industry needs next, in the post-IPO period, is transformation, innovation and deregulation."

Overseas financial companies have until now been barred from China's consumer banking market. As of June 30, they had just 214 branches in China, compared with a total of 70,000 for domestic lenders. To gain a foothold in the world's fastest growing major economy, international banks have spent US$19 billion to buy minority stakes in Chinese lenders since 2001.

To expand their reach, many international banks are now targeting affluent consumers with special services for those with balances of more than US$50,000.

One battleground will be Tianjin , a northern port city that was chosen for a pilot program in which companies will be allowed to convert some of their yuan earnings into foreign currencies through banks in the district.

One Tianjin computer entrepreneur expects to benefit from overseas banks ability to offer yuan-based checking accounts, loans and savings accounts.

"I'd like a comfortable place to sit down with a coffee in hand while I get loans or discuss wealth management," he said "You don't get that kind of service from Chinese banks."

Executives at China's state banks agree. In key big city locations, at least, state banks are responding to customer complaints.

Bank of China, the country's oldest bank, has remodeled its branch in Shanghai 's Lujiazui financial district with leather sofas, flat screen TVs and welcoming door attendants.

Competing head-on with domestic lenders promises to be bruising for overseas banks. To make up for their small branch networks, overseas banks have bought stakes in Chinese lenders and set up distribution partnerships.

Such partnerships were unthinkable when China began strengthening its financial system eight years ago.

The government has bought up US$400 billion of bad loans since 1998, and four of the country's five biggest lenders have held initial public offering s.

The banks are still overhauling their management and risk controls.

To date, overseas-domestic bank partnerships have been limited to selling foreign currency-based services such as mutual funds that invest abroad.

Starting today, they will be able to sell yuan-based funds. New rules require international banks to incorporate branches locally, subjecting them to regulations that limit lending to 75 percent of deposits.

Banks that don't comply must set aside twice as much capital and will be barred from taking small deposits or offering credit-based services.