China will allow the creation of up to five privately financed banks this year to support economic growth by gradually opening the state-run industry, the country's banking regulator says.
Analysts including the World Bank say an overhaul of Chinese banks that lend little to entrepreneurs is 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 it would enlarge the role of private capital in banking. It said that would include a closely supervised "pilot project" to allow creation of three to five privately financed banks.
The moves are aimed at promoting "modernisation of governance," the agency said. It gave no details of who would be allowed to set up a bank or in what lines of business they can compete.
Communist leaders are trying to inject more competition into China's economy while retaining control of key industries. They also are trying to reduce reliance on trade and investment to drive growth by encouraging more domestic consumption.
China's economic growth tumbled to a two-decade low of 7.5 per cent in the second quarter of last year, adding to the urgency of pushing through reforms. Growth rebounded to 7.8 per cent in the third quarter but the Cabinet has said it expects growth for the full year of 7.6 per cent, which would be the economy's weakest performance since 1999.
A reform plan issued in November promised to give the market a decisive role in allocating resources and to open more industries to private and foreign competitors. But it affirmed that state ownership will remain the core of the economy.
Any change to China's banks will be politically fraught because they are the ruling party's most powerful tool in controlling the economy and supporting politically favored companies with low-cost credit.
Change will be slow but privately financed lenders might inject more commercial thinking into a heavily politicised industry, said economist Lu Zhengwei at Industrial Bank in Shanghai.
"Privately financed banks would be more focused, with more realistic risk controls," said Lu.
The government of President Xi Jinping already has begun gradual steps to make the banking industry more responsive to the market.
In its first major reform, Xi's government announced an end in July to controls on interest rates banks charge on loans. That might spur growth by allowing borrowers to shop around for lower rates.
