China To Set Up Five Private Banks In 2014

After decades of relying on state banks, China is finally ready to open up the financial sector to private capital. Regulators announced it will roll out a “pilot project” to allow the creation of up to five privately financed banks this year to support economic growth.

The China Banking Regulatory Commission would maintain “prudential regulatory standards” in approving private banks, it said in a statement following a meeting on banking supervision. It gave no details of who would be allowed to set up a bank or in what lines of business they can compete.

The state-owned banking industry lends mostly to government companies. Small and medium-size firms are major employers, but are seen as a credit risk by state banks and have traditionally relied on loans from informal sources -- friends, family, other businesses, and underground banks – to run their operations. Giving those credit-starved firms better access to credit will help support economic growth and job creation.

The CBRC also said it will try to relax the threshold for foreign capital to enter China's banking sector and ease yuan operation requirements, while more policies will be issued to support banking reform in the Shanghai free trade zone and financial reform pilot zone, the state-owned Xinhua news agency reports.

The announcement comes as Beijing tries to rein in a surge in local government debt and shadow banking.

An official audit released last week showed that China's local government debt reached 17.9 trillion yuan ($2.95 trillion) at the end of June 2013, or up from 10.7 trillion at the end of 2010.

Overall, 43 percent of local government's debt came from nonbank sources. Shadow banking institutions, including trust companies, securities firms, insurance companies and leasing companies accounted for 11 percent of the local government debt. The rest of the nonbank debt is from bonds, individuals and a variety of loan guarantees.