Alibaba and Tencent in China's pilot private bank scheme

Alibaba is China's largest online shopping portal

Internet firms Alibaba and Tencent have been shortlisted as pioneers of a pilot scheme to set up private banks in China, as the country takes steps to open up its financial sector.

A total of ten companies have been selected to set up private banks.

The first five banks will be established in Tianjin, Shanghai as well as Zhejiang and Guangdong provinces.

No timetable has been given for when they need to be operationally ready.

The president of the China Banking Regulatory Commission (CBRC), Shang Fulin announced the initiative during a press conference, on the sidelines of the National People's Congress which is currently underway in the capital Beijing.

According to Chinese media each of the banks will be co-sponsored by at least two investors, although there were no details of how the ownership structure would work.

'A step forward'

Mr Shang added the private banks will be subject to the same regulation and supervision as existing commercial banks that are operating across China.

But the financial services of these private lenders will be geared towards servicing small and micro businesses, as well as residential communities.

Analysts have welcomed the move, marking it as a step forward for the world's second largest economy.

"A big problem of China's banking sector is that state-owned banks extend most of their lending to state-owned companies. It is very difficult for small and micro-sized companies and private firms to get a loan," said Shen Jianguang from Mizuho Securities.

Mr Shen also observed "this also will increase competition in the sector that has long been criticised as monopolised."

The reforms are an extension of plans which China's regulators announced last year - to allow the creation of privately financed banks to help make the Chinese economy more productive by giving market forces a bigger role.