Bank of Nova Scotia (BNS-T50.69-0.94-1.82%) is putting down more roots in China, hoping to take advantage of an increasingly wealthy middle class that has a growing need for personal banking.

In one of the largest investments by a foreign company in a Chinese bank since the global financial crisis, Scotiabank is paying $719-million for slightly less than a 20-per-cent stake in Bank of Guangzhou, a government-owned lender in one of China’s fastest growing economic regions.

Located in southern China a two-hour commute from Hong Kong, Guangzhou is a city of more than 10 million people, making it the nation’s third biggest, behind Shanghai and Beijing.

“There’s lots of attractive investment opportunities in China, but this one we felt was extremely compelling,” Brian Porter, Scotiabank’s head of international banking, said in an interview. “The banking penetration in this [area] is still fairly low, so as the middle class becomes more wealthy, they’re going to want to purchase homes and purchase cars and they’re going to need financing to do that.”

The stake gives Scotiabank a foothold in personal banking in China, albeit a small one. The Chinese bank has a network of 84 branches that provide personal banking services, but is predominantly a commercial lender to construction, steel and real estate companies. Bank of Guangzhou has $24-billion of assets and $16-billion of deposits, as of June.

For Scotiabank, however, the 19.99-per-cent stake is its biggest push so far into personal banking in China. Canada’s third-largest bank by assets began operating in China 29 years ago and has five branches of its own there along with other assets focused on commercial lending and wealth management.

It has a 14.8-per-cent stake in Xi’an City Commercial Bank, which it bought in 2009 for $162-million. Mr. Porter said the bank expects to increase that stake to 18.1 per cent, pending regulatory approval, and possibly to 19.99 per cent in the future. Ownership rules in China prevent foreign companies from owning more than 19.99 per cent of a Chinese bank.

Scotiabank also owns a 33-per-cent stake in a joint-venture fund management company with Bank of Beijing, which does not fall under the ownership rules for banks.

Investing in Chinese banks isn’t easy for foreign companies, with the government choosing carefully which suitors are allowed into the market. Rather than announce the deal as an acquisition, Scotiabank said in a press release that it had “been selected” to buy a stake in Bank of Guangzhou.

However, investments in Chinese banks have proven lucrative. In a bid to shore up its balance sheet, Bank of America sold half its stake in China Construction Bank two weeks ago for $8.3-billion (U.S.). The U.S. bank purchased 9.9 per cent of the Chinese lender for $3-billion in 2005, before the Chinese bank went public.

Though Scotiabank is investing for the long term in China, the deal is expected to precede an initial public offering of the Bank of Guangzhou, the 29th largest in China, in the next three years. The deal, which is subject to regulatory approvals, is expected to close in December, and will add to earnings in 2012.

When Scotiabank went looking for an investment to use as its entry point into personal banking in China, it had to choose carefully. Foreign banks cannot hold large stakes in more than two Chinese banks, and its existing investment in Xi’an City Commercial Bank meant one opportunity was already spoken for.