China to allow creation of five privately financed banks

China plans to allow the creation of up to five privately financed banks this year to support its economic growth, with the gradual  opening the state-run industry, the country's banking regulator said today.

According to analysts, an overhaul of Chinese banks that lend little to entrepreneurs was urgently needed to achieve the ruling Communist Party's goals of making the economy more productive.

The China Banking Regulatory Commission said in a statement yesterday that it would enlarge the role of private capital in banking. It added that would include a closely supervised "pilot project" for allowing the creation of three to five privately financed banks.

According to the agency, the moves were aimed at promoting "modernisation of governance," but it offered no details of who would be allowed to set up a bank or the line of business in which they could compete.

According to commentators, communist leaders were trying to step up competition in China's economy even as they retained control of key industries.

They were also trying to cut reliance on trade and investment to drive growth by encouraging more domestic consumption.

Meanwhile, China's cabinet introduced fresh controls on the multi-trillion-dollar shadow-banking industry through an order targeting off-the-books loans and shoring up enforcement of current rules, Bloomberg reports quoting three people familiar with the matter.

Included in these is a ban on transactions designed to avoid regulations, such as moving interbank loans off balance sheets to lower reported lending, according to the people, who requested not to be identified as the order had not been made public.

Such operations formed part of shadow finance, a term that described lending outside the banking system.

In a separate step aimed at reforming the system, the bank regulator said it would allow as many as five privately owned lenders to start operating this year.

The  cabinet order showed concern at the highest levels of government that shadow banking, forming 69 per cent of the  country's gross domestic product in 2012 as per  JPMorgan Chase & Co estimates, might imperil the stability of the financial system.