The China units of HSBC Holdings and Citigroup Inc have won initial approval to underwrite corporate debt in China, paving the way for them to be the first foreign banks to win the coveted licenses, sources told Reuters on Thursday.

China's National Association of Financial Market Institutional Investors (NAFMII), an industry association under the central bank that supervises the country's debt market, has given the two banks the green light to underwrite corporate debt, two sources with direct knowledge of the approvals said.

The two banks will still have to register with the People's Bank of China, the central bank, before they can start operations, the sources said, adding the banks may obtain the final approval over the next two weeks.

HSBC was not immediately available for comment. A spokesman for Citigroup in China declined to comment.

Analysts said the move marks a significant breakthrough for foreign banks in China.

The corporate debt market is one of the fastest-growing in China's financial industry. It offers huge growth potential, said Sheng Nan, a banking analyst at UOB Kay Hian in Shanghai.

Currently, only domestic banks in China are allowed to underwrite corporate debt such as short-term bills and medium-term notes on the interbank market.

Foreign banks have been hoping to get in on the rapidly growing market for corporate debt, as China encourages companies to raise funds in the bond market rather than relying primarily on bank lending.

China is aiming to make Shanghai into an international money hub, like New York or London, by 2020. One of the biggest hurdles facing this ambitious task is the lack of depth in its corporate debt market.

Regulators had previously allowed some foreign banks to underwrite government bonds as well as those issued by policy lenders, but the corporate debt market is potentially much more lucrative.

However, foreign banks will likely face tough competition from local players such as Industrial and Commercial Bank of China and Bank of China at the initial stage given the Chinese banks' strong local client network, said Sheng.

Over the longer-term, the foreign banks will definitely be a very strong competitor to the local players. But for now, it's unlikely they can threaten the market position of the local commercial banks, he added.

The outstanding issuance of short-term bills and medium-term notes totaled 2.29 trillion yuan ($353 billion) as of end-May, official data showed.

($1 = 6.482 Chinese Renminbi)

(Additional reporting by Soo Ai Peng; Editing by Kazunori Takada)