China said it will allow the first privately-owned banks to operate in the country this year as part of efforts to reform and open the banking sector.
Following through on reform plans announced at a major Communist Party meeting in November, the China Banking Regulatory Commission announced Tuesday investors will be allowed to own and operate up to five banks in a closely supervised pilot project. Ownership will be restricted to Chinese citizens, with foreign investment being considered for the future.
Independent financial commentator Gong Shengli told VOA's Mandarin service the reforms are needed because the monopoly of China's five major state-owned banks has reached unsustainable levels.
"These five banks have monopolized more than 80 percent of the currency flows in the national monetary market," he said.
All banks in China are state-owned. Critics said this has led to cheap and often ill-advised loans for state-run enterprises and a shortage of lending to private businesses.
Gong said the system forces many firms to seek loans on the black market.
"According to a survey of Chinese Academy of Social Sciences, in 2013 the scale of shadow bank lending accounted for 40 percent of all bank loans. But these shadow bank lending activities have been only operated in the underground, not in the sun," he said.
But underground banks lack the supervision and protection mechanisms to protect private enterprises or investors.