As foreign and domestic lenders prepare for the opening of China's banking market, in 2007, a survey suggests that domestic institutions might be better placed to defend their market position against foreign entrants than many people believe. Indeed, a consumer bias for personal service could leave many foreign banks ill prepared to compete in China's $40 billion retail-banking market.¹

Foreign banks in China are restricted from taking renminbi deposits or from operating more than a handful of branches in major cities. Even after 2007, when deregulation permits foreign lenders to offer services comparable to those of domestic banks, continued restrictions on the number of branches that foreign institutions can open will make it hard for them to close the enormous lead held by China's four largest state-owned banks—each with more than 20,000 branches, on average.

A McKinsey survey² of 844 mass-market and mass-affluent households in China suggests the degree to which these handicaps will impede the progress of foreign banks there. While Chinese consumers indicate some willingness to use foreign banks, their preference for local ones is stronger than ever: 78 percent of respondents...