Car finance western style could soon be on offer to Volkswagen buyers in China.

A report in the country's Business Daily Update said that the Bank of China has signed a letter of intent with Volkswagen to provide car loans for customers.

The agreement, signed between the bank and VW's car financing unit, Volkswagen Financial Services AG, will pave the way for VW to offer loans directly to individuals for the first time when the Chinese authorities finally give the green light.

Foreign car makers have not been allowed to offer car financing to customers in China but Beijing promised to open up the market as part of the country's commitments when it joined the World Trade Organisation in December 2001.

Although it promised access to foreign multinationals immediately upon WTO entry, companies such as VW, General Motors and Ford have been waiting for the People's Bank of China to issue details on how they can set up their operations and how they will be regulated.

A deal with Bank of China would be one way for them to minimise the amount of capital they would have to provide to their operations, one industry executive said.

"Automakers have limited sources of funding and most of them, especially the larger ones rely on money borrowed from other financial institutions such as banks, or corporate bonds, to fund their operations," he said. "Tying up with a local bank is one of many possibilities."

Neither GM nor Ford have said publicly how they will operate.

Kenneth Hsu, public affairs director for Ford in China, would not comment on Ford's plans. "But we do intend to set up an auto financing business here to support our sales," he said.

Ford earlier this month launched its first locally made car, the Ford Fiesta, with a target of 20,000 sales in its first year. It plans to launch the Mondeo full-sized sedan in China by the end of the year.

China's delay in allowing vehicle financing operations has been frustrating for car makers as they see the ability to offer loans as key to increasing sales in China, where most have set up joint ventures in order to tap a market virtually closed to imports.

While car sales in China have grown rapidly, buying them on credit is a relatively new phenomenon.