China plans new privately financed banks

China has been looking to loosen its grip on the financial sector

Up to five private banks will be created in China this year as it looks to open up the financial sector and raise competition in the industry.

The banks will be allowed to operate on a trial basis under the supervision of Chinese banking authorities.

Private finance will be used to either restructure existing banks or set up new ones "bearing their own risks".

China has been looking to open up its tightly-controlled financial sector to spur a fresh wave of economic growth.

"Strict procedures and standards will be set for the pilots, with demanding set-up criteria, limited licenses, enhanced supervision and a risk handling system," China Banking Regulatory Commission (CBRC) was quoted as saying by the state-owned Xinhua news agency.

The CBRC also said that it would explore lowering the threshold for foreign banks to enter the industry.

Shadow banking rules

The move by China also comes at a time of growing concerns over the rise of shadow banking in the country.

Over the past few years lending by non-banking companies has grown rapidly in China, fuelling a surge in debt levels in the world's second-largest economy.

Critics have argued that shadow banking poses a major risk to China's economic growth and also makes credit less transparent.

Prompted by these concerns, Chinese policymakers have drawn up new regulations for the sector.

The draft rules have not been publicly released, but various media reports indicated they have called for greater supervision and monitoring of the shadow banks.

However, the document proposing the rules said that shadow banking had also benefited the economy.

"The emergence of shadow banks is an inevitable result of financial development and innovation," the Financial Times quoted the document as saying.

"As a complement to the traditional banking system, shadow banks play a positive role in serving the real economy and enriching investment channels for ordinary citizens."

The document stated that at present the country's "shadow banking risks are under control overall".

But it added that "as the 2008 global financial crisis demonstrated, shadow banking risks are complex and hidden, and vulnerabilities can emerge suddenly and spread easily causing systemic problems".

'Support banking reform'

Faced with a slowdown in its growth rate, Beijing has been looking to loosen its grip on the financial and capital markets.

Many analysts have said that opening up the sectors is key to China's future growth.

In December, China's central bank said it will allow banks to trade deposits with each other, using a financial product called certificates of deposit.

The interest rate on the certificates will be determined by the market, unlike ordinary deposits, which are subject to rate caps in China.

The central bank also scrapped the lower limit on lending rates offered by financial institutions last year, a key step towards liberalising interest rates.

In September, China launched a free-trade zone in Shanghai where controls on key sectors will be eased. Measures to be trialled inside the zone include market-driven interest rates.

On Monday, the banking regulator said "more policies will be issued to support banking reform in the Shanghai free trade zone".