The development of China's banking sector can be seen as a case study of how competition from international companies can enhance an industry.

After years of coexistence with their international counterparts, domestic banks have proved that they can stand on their own.

The average non-performing loan (NPL) ratio of China's banking sector has dropped below 5 percent from 34 percent in 1999.

Meanwhile, Chinese banks have also become more active in the international market.

In early February, the banking regulator approved the Industrial and Commercial Bank's purchase of a 20 percent stake in South Africa's Standard Bank. ICBC agreed to pay 5.6 billion U.S. dollars for the stake - the biggest overseas investment by a Chinese firm.

China Development Bank last year bought a 3.1 percent stake in Britain's third largest lender Barclays Plc for 2.94 billion dollars and now is reported to be holding preliminary talks with Germany's Allianz SE to acquire its Dresdner Bank unit.

Foreign banks' business expansion in China, however, also underwent ups and downs in the past years.

In 1994, the first comprehensive law governing the nationwide activities of foreign-funded banks - Regulations on the Administration of Foreign-funded Financial Institutions - was approved. It standardized foreign bank's activities in China, including market access requirements and supervisory standards.

From 1994 to 1997, the number of foreign banks in China more than doubled to 175, while their assets quadrupled.

However, after the Asian financial crisis, foreign banks became more cautious in their business in the Asia-Pacific region and subsequently scaled down their expansion plans in China.

Several banks even retreated from the Chinese market. From 1998 to 2001, only 15 new foreign banking organizations established offices in China.

But the situation changed after China's entry into the World Trade Organization. In the five years following WTO accession, the number of foreign banks increased from 190 to 312.

But the big push by foreign banks in China occurred after the full opening up of the banking sector in December 2006 under the WTO arrangement.

Meanwhile, foreign banks have been active in forging business and equity partnerships with local banks, although a foreign institution can only own up to 20 percent of the equity of a Chinese bank, and the total ownership of foreign equity investors is restricted to 25 percent.