China will encourage greater private investment in the banking sector by allowing private investors to take controlling stakes in village and township banks, according to an official at the China Banking Regulatory Commission (CBRC), a move analysts said yesterday could allow private capital to compete fairly in the financial market.

The barriers for private capital in entering the banking sector are already low, Yang Shaojun, vice director of the General Office at the CBRC, said Tuesday at a press conference for Lujiazui Forum 2012, which starts today in Shanghai.

The rules issued by the CBRC recently to support the State Council's policy for encouraging private investment, which is known as the "New 36 Clauses," give greater scope for the country's private sector to participate in the banking industry, said Yang.

Yang said that the major initial investors in village and township banks, usually local authorities or joint-stock banks, would be allowed to lower their shareholding ratio so that private investors can take a controlling stake.

"To lift the restrictions on the controlling shareholder in rural banks will allow micro-credit companies to become the major shareholders and thus compete fairly in the financial market," Lian Ping, chief economist of the Bank of Communications, told the Global Times. 

"Private investors that hold the major stake in a bank do not necessarily bring potentially high risks. The risk in a bank is largely connected with the management system and external supervision," he said. 

By the end of 2011, among the total capital stock of city commercial banks and joint-stock commercial banks, private capital accounted for 54 percent and 42 percent respectively, while private capital accounted for 92 percent of the stock in rural small- and medium-sized financial institutions. 

"Some State-owned enterprises get bank loans at low interest rates and then offer it as a loan to small banks in order to reap an interest margin, pushing up the operating costs of small companies. To solve these problems, we must boost the role of private capital to enhance competition in the sector," Wang Xiaolu, deputy director of the National Economic Research Institute under China Reform Foundation, told the Global Times.