HONG KONG - Chinese and U.S. regulators are negotiating a pact aimed at encouraging Chinese financial institutions to buy into small and medium-sized banks in the United States, bankers briefed on the plan said on Tuesday.

Chinese bankers have complained that it's been difficult for them to set up branches or invest in banks in the world's leading economy, due partly to U.S. regulators' tough supervision and strict approval process for financial deals.

But the global financial landscape has been revamped by the credit crisis, and cash-rich Chinese banks are now bigger players on the world scene and are scouting around for investment targets.

To illustrate the global shake-down, Industrial and Commercial Bank of China is now the world's biggest bank by market value, while Citigroup Inc , once the world's No.1 bank, is worth the same as a second-tier commercial bank in China.

Two senior Chinese bankers said they had been invited this year by U.S. officials, investment bankers and financial advisers to look at several potential investments in U.S. banks, mostly in financial trouble.

The trend is already there, said one Chinese banker. Now they're going to make this into an agreement to show there's a change in official attitude towards Chinese investments in the U.S. banking system, said the banker, who declined to be identified due to the sensitive nature of the matter.

A Sino-U.S. Memorandum of Understanding (MOU) to encourage Chinese banks to invest in U.S. lenders is in the making, and China's banking regulator has sought feedback from big domestic banks, bankers told Reuters.

Over 100 U.S. banks have already been seized by regulators in the financial crisis, and more bank failures could come as the Obama administration also needs more capital to take over troubled lenders.

NO HURRY TO BUY?

The MOU would be part of a new strategic framework that ranges from climate change to international cooperation, Hong Kong's South China Morning Post reported on Tuesday.

The hope is to announce a deal during U.S. President Barack Obama's current visit to China, the newspaper said, citing unnamed mainland bankers briefed on the matter.

In October 2007, Minsheng Banking Corp, China's seventh-largest by assets, agreed to buy 9.9 percent of San Francisco-based UCBH Holdings Inc for more than $200 million in the first investment by a mainland Chinese bank in a U.S. bank.

But Minsheng has seen huge paper losses on its investment in UCBH, whose business focuses on mortgages for many Chinese Americans on the U.S. West Coast, as UCBH shares sank in the financial crisis.

Other Chinese banks such as ICBC and Merchants Bank have also shown an interest in expanding in the United States, but their approach may be different.

I feel lots of uncertainties still exist in the U.S. financial market and we want to keep a distance from these toxic assets at this moment, said Ma Weihua, CEO of Merchants Bank, China's sixth-largest lender by assets.

Our attitude towards U.S. financial assets is very conservative right now, Ma told Reuters by telephone.

Merchants Bank opened its first U.S. branch in New York about a year ago, and Ma said the branch would hire more local staff to expand its business there. (Additional reporting by Twinnie Siu and Don Durfee, Editing by Ian Geoghegan)

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