Private banks to get green light

China pledged Friday to allow the establishment of privately funded banks run independently from the government, a significant change in the typically State-controlled banking sector.

Private capital will be permitted to establish commercial lenders independent of government control and bailout, the State Council said in a guideline outlining the role of the financial sector in economic restructuring. The guideline did not specify a timeframe or implementation details.

Experts told the Global Times that introducing privately owned banks would not only help to financially support poorly funded domestic entrepreneurs, who are major contributors to the country's economy and job market, but also drive up profitability for banks, which are heavily reliant on preferential policies.

Treated as a lever to control the country's economy, Chinese banks are normally funded and run by the State, Wu Hong, vice president of the China Banking Law Society, told the Global Times.

Among the 17 national commercial lenders in China, only Minsheng Banking Corp is mostly funded by private capital and run independently, while the others are controlled by either the central government or local governments.

The State-dominated banking sector has tended to lend its government-limited credit to either State-owned enterprises or politically favored projects such as infrastructure construction, rather than to credit-starved private firms, especially risky small and medium-sized enterprises (SMEs), Wu explained. "The upcoming move will work to channel more credit to productive but little-funded manufacturing activities, a positive signal to the country's economy, which has suffered capital misallocation."

Yu Fenghui, a senior officer from Agricultural Bank of China, offered another perspective. Yu told the Global Times that the inflow of private banks will encourage national commercial lenders, who are profiting heavily off the spread of lending and deposit rates, to diversify and improve their services to secure high-profit customers.

Minsheng, the country's only private commercial lender with a nationwide business, was established in January 1996 and has long been devoted to offering loans to SMEs seeking funding between 500,000 yuan ($81,450) and 5 million yuan.

Minsheng's revenue from the spread of lending and deposit rates accounted for 74.83 percent of its year-on-year revenue growth last year, lower than any other national commercial lender, according to the company.

China's eastern city of Wenzhou, the country's hub of private industry, was allowed to bring more private capital to the local financial sector as early as March 2012 as part of financial reform trials in the region.

The private capital came to as much as 84.6 percent of the overall banking assets in Wenzhou by the end of last year, according to figures from the local branch of the China Banking Regulatory Commission.

Expanding the initiative nationwide will pave the way for the reform of the country's banking sector, Yu said.

To support the setup of privately owned banks, Wu suggested that the country should not only bring interest rates and other areas of banking under market control to allow private banks to compete with State-owned peers on a level footing, but also accelerate its steps toward a deposit insurance system, which could help protect depositors' money in the event of bank insolvency.