Private business people may have been encouraged by reports last week that they could soon be allowed to set up new banks, but some financial experts warn that the nation is not ready to take such a step in the near future.

China still lacks a sound legal framework, an environment that fosters qualified private entrepreneurs and a sufficient level of social credit to stave off financial risks that may ensue, they argue.

"Financial resources cannot just be opened up like that," said Wang Songqi, a senior economist with the Chinese Academy of Social Sciences. "The lessons of the mid-1980s have taught us when the right is given to local governments and private businesses, chaos will follow."

Local governments and private entrepreneurs set up a huge number of trust companies and urban credit co-operatives in a reform programme in the 1980s. Irregularities at those firms were believed to have added fuel to real estate bubbles that later burst, leaving thousands of mansions unfinished and derelict.

Wang's comments followed last week's review by a panel of senior economists of the five proposals to set up more private banks, prepared by a special research institute.

China's first private bank - the China Minsheng Banking Corporation - was established in 1996 with a special regulatory authorization. But no further approvals have been made or relevant regulations promulgated since then despite such calls from advocates.

The panel review was widely reported by the media and its findings were believed to influence final regulatory decisions, but was attacked by some as unrealistic.

"Without adequate preparations, opening up (the banking sector) to private capital is risky," said Qiu Zhaoxiang, dean of the School of Finance at the University of International Business and Economics.

Qiu said before the liberalization, there needs to be strict and detailed entry requirements on issues like registered capital, business plans and qualification of senior management, and a workable exit mechanism to ensure that insolvent private banks are shut down promptly.

A deposits insurance system will have to be built to protect the interests of depositors and prevent possible bank runs, he said.

Regulators also need to draft uniform and consistent supervisory rules that aim to preclude such possibilities as insider trading and the illegal use of bank loans, Qiu said.

Advocates have said that allowing new private banks will help mobilize more private funds in supporting economic growth, and that private ownership is more efficient in bank management and can help prevent the repetition of problems that China's State-owned commercial banks have long suffered.

But sceptics say private banks in China, which are likely to be much smaller than existing banks due to the strength of the fast-growing yet still young private sector, will possibly be frustrated by poorer profitability and difficulties in product innovation simply because of the small size.

Management efficiency at private banks is not necessarily higher than existing banks, they argue, and there is a stronger possibility of moral hazards, given the shaky reputation of some Chinese private entrepreneurs.

The recent downfall of property tycoon Zhou Zhengyi and the trial of flower entrepreneur Yang Bin, both among the richest Chinese, have put the integrity of China's nouveau riches under increasing scrutiny.

And Minsheng, the sole private bank so far, is not one in the strictest sense and has not shown a high level of efficiency that advocates have claimed as an advantage of private banks, some experts said.

"The senior managers are appointed by the government... their management is far from modern management," said an insider.

Media reports said the five proposals showed unrealistic ambitions, with one candidate bank planning to become the "Citibank in the East" in 20 years, and an eagerness for high shareholder returns, which some economists on the panel said was dangerous in a sector that values safety over profits.

The proposals are reportedly being revised and will be submitted to the China Banking Regulatory Commission later for approval.

Private companies have already invested in a number of existing city commercial banks and credit co-operatives in East China's Zhejiang Province, where reform programmes, mainly joint-stock restructurings, are being trialed.

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