The interest by two of Europe’s largest banks in a medium-sized Chinese lender underlines the country’s growing importance to overseas financial groups seeking to capitalise on the country’s rapid economic growth and rising wealth.

People close to the Chinese bank said Deutsche had entered the fray in the past two months as ING’s long-standing talks with the Beijing lender had failed to reach an agreement.

It is understood Deutsche is carrying out due diligence on the government-owned lender, which was the 16th largest among China’s 112 city banks, with assets of Rmb209bn (US$25.3bn) and deposits of Rmb189bn at the end of last year. Its non-performing loans were 4.8 per cent of total loans last year, below the industry average.

However, ING is believed to be still in talks with Bank of Beijing and a decision on a stake purchase by either foreign group is expected in the next two months.

A stake sale by Bank of Beijing could herald a new wave of overseas investments in smaller city banks, which have fewer financial and management problems than the giant Big Four lenders. China Construction Bank and Bank of China, two of the Big Four, are seeking foreign partners ahead of planned multi-billion dollar listings.

But the size of such an investment and concerns about bad loans have deterred buyers so far.

Analysts said foreign bidders would have to pay about US$200m for a stake of up to 25 per cent - the maximum allowed - in Bank of Beijing. The lender, which is considering a domestic listing this year, has more than 90 branches in the city and is likely to take advantage of a recent rule change to expand outside Beijing.

The three banks declined to comment on Monday but people close to the deal said no price had been set and the talks could collapse.

Although foreign groups are limited to minority stakes in Chinese banks, the government’s efforts to reform the financial system and hopes of further sector deregulation have sparked a flurry of activity.