BEIJING — The faux marble lobbies are in place. So are the fancy logos outside. And there's a new treat inside for customers: Tellers actually smile.

China's banks are modernizing, and they'll soon be tested. At the end of 2006, the banking sector is scheduled to open to limited foreign competition.

China is opening the door slowly so that it can help its government-owned banks, which were long burdened by huge amounts of bad loans. Yet foreign bankers eagerly await a chance to compete. At stake is $1.8 trillion in household savings in the world's most populous nation.

"There's a huge amount of personal wealth here, which foreign banks would love to manage. There is significant opportunity for them," said Stephen Green, a senior economist at Standard Chartered, a British bank with a rising presence in China.

Under rules established under China's accession to the World Trade Organization in 2001, foreign banks will be allowed to do business with customers in the national currency, the yuan, anywhere in China starting in December.

Until a few years ago, China's financial institutions acted less like banks than state development agencies, lending recklessly to money-losing state enterprises.

Since 1998, the government has injected more than $260 billion into the banks, helping to improve the ratio of nonperforming loans in overall bank portfolios from 17.9 percent in 2003 to 8.9 percent at the end of April, according to bank regulators.

"That's a dramatic drop," said May Yan, a China banking analyst for Moody's Investors Service in Hong Kong. "The government is assuming a lot of these liabilities."

Now, the banking sector is hot. Global investors, believing that the days of bad lending may be over, bid up shares of China's big banks as they go public. Bank of China, the country's No. 2 lender, grabbed $9.7 billion this week in an initial public offering in Hong Kong. It was the world's largest public offering in six years. Shares soared 15 percent Thursday in their first day of trading on the Hong Kong Stock Exchange.

China's bankers interpret the success of the state-owned banks that went public as faith in their abilities to correct past problems, grow rapidly and confront the challenge of foreign competition.

"They have established clients, they have better information and they have cultural advantages," said Wang Songqi, editor-in-chief of The Banker, a private magazine.

They also have scale. The Industrial and Commercial Bank of China, for example, has 360,000 employees in 20,639 branches and 250 million customers.

Faced with such behemoths, foreign bankers warn that change may come slowly.

"It will take time for foreign players to build up their businesses in China. This will not happen overnight," said Richard Stanley, the chief executive of Citigroup China.

Some foreign banks are taking stakes in Chinese banks. Nineteen of them, including Bank of America, Deutsche Bank and UBS, have invested in 16 Chinese lenders. China limits their investment to no more than 20 percent of any single bank, but foreign banks are pressing to have the cap raised.

Other banks, such as Citibank, Standard Chartered and HSBC, plan head-to-head battle, eyeing consumer credit, mortgage lending and asset management for high-wealth individuals — all fertile and undeveloped markets.

Foreign banks must obtain licenses and deposit millions in cash in China. Opening branches includes cumbersome red tape. China is demanding a "go slow" approach, wary that foreign banks hold the upper hand in consumer credit, efficiency and managing risk.