Sir Fred Goodwin — which to those not familiar with the characters is “happy birthday” in Chinese — and it’s a language the chief executive of Royal Bank of Scotland is going to learn a lot more about.

Last Wednesday, as Goodwin marked his 47th birthday, his group was putting the finishing touches to a deal that gives RBS a strategic stake in Bank of China, the country’s second- biggest bank. For an initial outlay of £900m, Goodwin has bought a seat at the table of the biggest growth market in financial services in the world.

RBS is one of three co-investors that last week acquired a 10% stake in the company for £1.7 billion. It will be the biggest investor, with a 5% stake. The other two are Li Ka-shing, the Hong Kong billionaire, and Merrill Lynch, the American investment bank.

In financial terms the bet that Goodwin has made is not big when compared with RBS’s market value of £51 billion. However, in terms of reputation and strategy it is, but Goodwin believes it is a risk worth taking. He said China was just too big an opportunity to miss: “It would be remiss of us not to have some sort of interest in that area . . . and BoC gives us material opportunity to grow in a controlled way.”

To protect RBS from any shocks in BoC’s balance sheet, Goodwin has put in place a series of warranties and other safeguards. These include an option to make BoC buy back its stake in three years if the partnership has not worked or if the flotation of BoC next year (which could book RBS a big paper profit) is abandoned.

Analysts say these safeguards, unprecedented in a state-owned group, are essential for Goodwin to provide comfort to his investors.

In recent years BoC has been rocked by a series of financial scandals, the latest being the prosecution of Liu Jinbao, president of the Hong Kong branch of the bank, who has been sentenced to death for corruption, although the sentence has been suspended for two years.

Bankers say those employed at the top of BoC are highquality, but that is not always mirrored in the provinces where banking practices are more dubious. That is one reason why Standard Chartered has opted to set up its wholly owned retail bank in China.

China’s big four banks are also just recovering from the aggressive overlending from the last boom, which resulted in a government bail-out and there are concerns that this cycle of underperforming loans may be repeated. Analysts say the Chinese government has had to use $60 billion (£33 billion) from the nation’s foreign-currency reserves in the past two years to prop up the capital bases of the BoC as well as its two rivals, China Construction Bank and the Industrial & Commercial Bank of China.

The deal gives RBS a platform to push through its own products. China’s attraction is a growing and debt-free middle class, an ideal target for the British bank’s credit-card, wealth-management and personal-insurance businesses. There is also plenty of scope for its corporate-banking operation to tap into China’s booming economy.

But RBS does not have the field to itself. This is the third deal in three months involving a big foreign player acquiring a stake in a state-owned bank.

The relationship is not just one-way. BoC also has a lot to gain. Goodwin is expected to join the board of the Chinese bank and his executives will teach BoC about modern methods of risk management and corporate governance — essential skills ahead of the opening-up of China’s financial sector to foreign competition next year.

When rumours first surfaced that RBS was looking to acquire an interest in BoC there were concerns that Goodwin might be taking a $5 billion (£2.8 billion) gamble. Investors were anxious about the scale of the deal and many voiced concerns. When the terms were finally announced, shareholders were relieved that Goodwin had not overpaid and that the deal was being financed from the sale of the group’s remaining stake in Spain’s Santander Bank, which recently bought Abbey.

Investors can also see the potential benefits of exploiting BoC’s huge footprint. The bank has 11,037 branches, with a large concentration in east China, and 238,000 staff. Nic Clarke, a bank analyst at Croesus, said it had a market share of 12% of loans and 14% of deposits. According to the last set of accounts its total income was $12.6 billion and its gross assets added up to $516 billion.

Goodwin said: “We have the capital available to make a 10% investment had we been minded to do so. But as we have said all along, we have a finite appetite for holding minority equity investments in other banks and it is no coincidence that the amount we are investing in BoC corresponds to the amount we have had invested in Santander. We are in this for the strategic partnership and the relationship with BoC; we are not in it for the equity investment. The equity investment, if you like, is a ticket to the game.”

Other players in that game include HSBC, which owns stakes in three Chinese banks, including a holding of 19.9% in Bank of Communications, China’s fifth-largest lender. Bank of America has also paid $3 billion for 9% of China Construction Bank.

John-Paul Crutchley at Merrill Lynch believes that “deal risk” and the fear that RBS would overpay for a big acquisition has haunted the group’s share price. The terms of the Chinese deal remove some of that. He believes that RBS has the most upside when compared with any rival big British bank. He has set a target price of £20.30 compared with Friday’s close of £16.45.

Goodwin has struck a canny deal in China, but there is a long way to go before we see the financial returns. And for an economy that has grown as fast as China’s, it remains to be seen how exposed the country’s banks are, should that growth slow dramatically.

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