Royal Bank of Scotland (RBS), the owner of Ulster Bank and First Active, has taken a foothold in one of the world's leading economies as head of a consortium that will pay $3.1 billion (€2.54 billion) for a 10 per cent stake in Bank of China (BoC).

The sale of the stake to a group that includes Merrill Lynch and the tycoon Li Ka-shing, ends a two-year search for "strategic investors" by BoC and paves the way for a Hong Kong initial public offering (IPO) in the first half of 2006.

The consortium, which committed to holding its stake for three years, also won unprecedented warranties and protections from Beijing to shield its investment from a sudden deterioration in the state lender's finances and other risks.

The concessions won by RBS are believed to be the first such guarantees granted to a foreign investor in a Chinese state company. RBS, conscious of investor concerns about its appetite for acquisitions, yesterday said it had no plans to increase its 5 per cent stake in BoC, for which it will pay $1.6bn.

Investment bankers said the move could have profound implications for future Chinese privatisations and prompt other foreign companies to seek similar safety nets.

"Many have tried but Beijing had always said "no" in the past," said a China-based banker. "This could create a precedent."

The RBS deal values BoC at $30 billion - in line with China Construction Bank, its bigger rival. Analysts said this could mean that the expected IPO of about 25 per cent of BoC could exceed $3 billion. The estimated $750 million investment by Merrill Lynch makes it a favourite to win one of two or three underwriting mandates for the IPO.

With UBS also in talks to buy a stake worth about $500 million in BoC, Goldman Sachs could be in danger of losing out on the landmark IPO despite its longstanding links with the Chinese bank.

With BoC's 11,307 branches controlling 12 per cent of the Chinese market for loans and 14 per cent of its deposits, the deal is an important first step for RBS in Asia, which represents only about 1 per cent of its profits.

RBS, which will receive one board seat that is likely to be taken up by its chief executive Fred Goodwin, and BoC pledged to co-operate on credit cards, wealth management, corporate banking and insurance.

RBS is also expected to help BoC, which has been hit by a string of scandals and internal fraud, to improve corporate governance and risk management.

Shares in RBS rose on the news illustrating investors' relief that the investment had not been larger.