China's private enterprises are overjoyed with the nation set to permit the first batch of private banks soon, according to sources close to the China Banking Regulatory Commission (CBRC).

The commission, the banking industry's watchdog, will invite 60 prominent banking experts to a special meeting today to discuss the feasibility reports filed by five candidate private banks.

The five candidates are: Shenyang Ruifeng Bank in Liaoning Province, Xi'an Great Wall Bank in Shaanxi Province, Sunan Bank in Jiangsu Province, Guangdong Nanhua Bank and Shenzhen Dongyue Bank in Guangdong Province.

Well-known experts including Wu Jinglian, Lin Yifu, Xu Dianqing, Fang Gang, Mao Yushi, Tang Min, Zhang Shuguang, Ba Shusong, Guo Shuqing and Xie Ping will attend the meeting.

"It is a significant breakthrough for China's banking sector, which will likely change the competitive landscape of the country's banking sector," said Xu Dianqing, director of the Great Wall Finance Research Institute, which has led a private bank pilot scheme in the past few years.

"Establishing private banks is one of the core reforms in the highly risk-sensitive banking industry," said Tang Min, chief economist of the Asian Development Bank Resident Mission in China.

Xu said China needs to establish an insurance system for banking deposits, plus market access and exit rules, before opening the banking sector.

"Given that the country lacks a deposit insurance system and banking access rules, the private bank experiment should go hand in hand with the State-owned banks' reform and the strengthening of banking supervision," said Tang.

"The presence of private capital in the banking sector and the improvement of corporate governance in small and medium-sized banks is of great significance," Tang said.

Xu said that private banks, in their initial stage of development, will mainly target the country's emerging private sector, which has not been adequately served by existing commercial banks.

Some of the country's largest private enterprises have long been urging a policy change, anticipating that their stakes in private banks will give them access to easy finance and new channels to gain a foothold in the financial industry.

The government, however, has been cautious, recalling the difficulties in the early 1990s, when private funds flooded the then new urban credit co-operatives, forcing the government to later rein in the banking industry.

"Private capital is not naturally unreliable. The tangled private financing arose from misinterpretation of government policies," said Yi Gang, senior researcher with the People's Bank of China, the central bank, adding: "Some people forecast the new access to the banking industry would be only short term and their actions went against the government's intention."

Yi said banking authorities needs to further improve its regulatory forces with the private banks in mind.

"One primary principle is that private banks cannot make loans to their private shareholders," said Yi.

A survey released only days ago by PricewaterhouseCoopers showed private banks in Hong Kong and Singapore expect the mainland to be the focus for their market development over the next three years as the country opens its financial sector.

(HK Edition 07/22/2003 page1)