THE government has drafted the country’s first rules governing acquisitions by commercial banks of financial companies at home and abroad.

The rules are expected to remove a potential expansion hurdle in a nation that’s home to the world’s largest bank by market value.

The China Banking Regulatory Commission (CBRC) has sent the draft rules to banks for consideration.

China’s three largest publicly traded banks, led by Industrial & Commercial Bank of China Ltd., have about US$419 billion in cash between them. A lack of regulatory transparency had hampered the ability of lenders to expand into industries such as insurance through takeovers, said lawyers and analysts.

“Now it’s clearer and more predictable,’’ said Roy Zhang, a Shanghai-based lawyer and partner who specializes in bank mergers at King&Wood, one of China’s largest law firms. “Undoubtedly we are going to see more deals going through.’’

The new rules banned banks from acquisitions that would push their capital adequacy ratios to below 10 percent, the document said. Deals must not create monopolies or undermine effective competition, it said.

Domestic banks are barred from investing in non-bank financial institutions unless stipulated otherwise by the State, according to 2003 revisions to the nation’s Commercial Bank Law.

While domestic acquisitions of non-bank financial companies would be covered by the new rules, they’ll need approval from the State Council, or Cabinet, according to the draft. Overseas purchases only needed approval by the CBRC, it said.

“Chinese commercial banks are very enthusiastic about making cross-sector acquisitions,’’ said Zhang Xi, an analyst at China Galaxy Securities Co. “This will provide a good opportunity for bigger banks, especially as valuations of financial equities drop.’’

The MSCI World Financials Index has lost 17 percent since July, when global credit markets began seizing up amid rising U.S. home loan defaults. The MSCI China Financials Index has tumbled 37 percent from its Nov. 1 high.

Collapsing profits and market values of banks and securities firms such as Citigroup Inc., UBS AG and Merrill Lynch & Co. have prompted speculation that Chinese banks would start using the US$63 billion they raised in stock sales over the past three years for acquisitions.

The 10 percent capital adequacy rule might make it difficult for smaller lenders such as Huaxia Bank and China Minsheng Banking Corp. to gain clearance for takeovers, China Galaxy’s Zhang said.

Huaxia had an 8.3 percent capital adequacy ratio at the end of 2007. Minsheng was at 10.7 percent. (SD-Agencies)