Flush with cash and swaggering with world-beating valuations, China's financial firms are scouring the globe for acquisitions but are more likely to settle for small stakes in big, established rivals.

A lack of market-based management expertise, as well as political sensitivities -- especially in the United States -- mean Chinese buyers are not expected to splash out on blockbuster takeovers of western rivals.

China CITIC Bank Corp, owned nearly 5 percent by Spain's Banco Bilbao Vizcaya Argentaria, is in talks for a stake in a European bank, while Bank of Communications is in negotiations to buy into an Indonesian bank, sources familiar with the situations said.

Industrial and Commercial Bank of China, the world's most valuable bank, last month agreed to pay $5.6 billion for 20 percent of South Africa's Standard Bank and is in negotiations for a Vietnamese bank stake, other sources said.

It's unlikely we will see a 100 percent acquisition of a large financial institution in the U.S. or Europe, said Richard Gibb, head of the Asia Pacific financials group at Merrill Lynch.

More likely are transactions that involve control or substantial positions in institutions based in Asia, or significant minority positions -- up to 20 percent -- in more developed markets, said Gibb.

Excess capital and high stock prices mean mainland institutions are eyed as potential rescuers of western peers beset by the subprime mortgage crisis.

For example, Bank of China and ICBC were separately asked to join a possible bid for a stake in the UK's troubled Northern Rock, sources in China said.

WARM OR WARY WELCOME?

European and Asian firms are seen to be more open to Chinese investment than their U.S. counterparts, in part due to potential political opposition in the United States, where ICBC and China Construction Bank have been frustrated in their attempts to win approval to open branches.

Beijing is still smarting from Washington's opposition in 2005 to CNOOC Ltd's bid for U.S. oil firm Unocal.

As we have seen in other sectors in the United States, issues have been raised really for political purposes, perhaps, as opposed to more fundamental economic purposes, said Elaine LaRoche, an independent director of China Construction Bank.

But I think that Treasury Secretary Paulson has done a lot to try and foster the Chinese dialogue and to develop on a more constructive basis the relationship between China and the U.S., especially in financial and commercial sectors.

One investment banker said that China Construction Bank, ICBC and China Merchants Bank were the most likely overseas acquirers among China's big lenders.

I think the targets are any big bank in the world that's going to come under stress as a result of crap on their balance sheet over the next 6 to 12 months, the banker predicted.

Wall Street's ailing Bear Stearns last month struck a $1 billion equity swap with China's CITIC Securities.

Meanwhile, China Jianyin Investment Securities, controlled by an arm of China's central bank, has been said by industry sources to be eyeing a potential tie-up with a major global brokerage, possibly the subprime-battered Merrill Lynch.

THINKING GLOBAL

China, whose huge state-run banks were as recently as five years ago regarded as insolvent by Western standards, has made no secret of its global financial ambitions.

The banks are following their clients. They are also looking at the Middle East, as well as additional developing countries, said Robert Dodds, HSBC's head of China M&A. These banks have money, and the deals tend to be big.

Beijing is looking abroad in part to deploy excess capital. China Investment Corp, the new $200 billion sovereign fund, invested $3 billion in the IPO of buyout firm Blackstone Group, for example, while China Development Bank bought a $3.14 billion stake in Barclays Bank.

We're looking at many countries, though no decision has been made, Qian Wenhui, vice president of Bank of Communications, told Reuters. Overseas acquisition is good for Chinese banks, because you need to diversify your investment and explore new opportunities when your bank is becoming bigger and bigger.

Some observers have warned that just because Chinese institutions can make overseas acquisitions doesn't mean they all should. The unhappy experience of Japanese institutions during the bubble era of the 1980s serves as a cautionary tale.

Peer pressure could also be a factor.

There are people, some of the bigger guys, with clear criteria. Others are just: 'Gee, I want to buy', one investment banker said.

(Additional reporting by Joseph Chaney; Editing by Jean Yoon)

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