Chinese private firms have rushed to apply to set up private banks, under government regulations designed to open up the much-hyped market. But the nascent sector still has a long way to go before better serving the real economy and facilitating financial reform.

Over 20 listed private companies on China's A share market have so far tried or showed interest in establishing private banks, causing related shares to surge for a string of days.

Retail giant Suning Commerce Group Co., Ltd. , whose shares have risen about 70 percent within a month, has registered with the State Administration for Industry and Commerce to open private banks. It is now waiting for the green light from China's top bank regulator, the China Banking Regulatory Commission.

Zhongguancun, a national innovation and high-tech hub in Beijing, is preparing for a private bank to serve cash-strapped high-tech firms, and it is expected to be first to earn the final approval from regulators.

Easy financing, profitable returns and rich financial services have lured enterprises in Beijing, Guangdong Province and Zhejiang Province among others to apply for the right to set up private banks.

The rush accelerated after the State Council, or China's cabinet, in July unveiled guidelines on setting up such banks invested by private capital and bearing risks themselves. It believes they can aid cash-strapped small businesses and mitigate financial risks.

Under the guidelines, banks will be encouraged to widen credit securitization to help channel more credit to small firms, the State Council said.

In an article published in a flagship Communist Party of China magazine in mid September, Zhou Xiaochuan, governor of the People's Bank of China, called for inclusive financial development that includes allowing private capital to set up banks.

Zhou stressed the need to "support private capital to set up private banks and guide them to position themselves in serving small and micro companies."

With fierce competition among commercial banks, privates banks positioned to serve communities, farmers and small businesses may enjoy better development, said Guo Tianyong, a financial studies professor with the Central University of Finance and Economics.

The boom in Internet finance may well pave the way for private capital to enter the banking sector, added Wu Xiaoling, a member of the National People's Congress Standing Committee and former vice governor of the People's Bank of China.

Current internet finance businesses such as online transactions and online loans can be combined to apply for a banking license, thus accommodating information, channel and price, Wu said.

Internet giant Alibaba joined hands with China Minsheng Banking Corp., Ltd., the largest private bank in China, to capitalize on their strengths in consumer data analysis, direct selling and IT services.

However, private capital should stay alert to risks when entering the banking sector as bankruptcy may risk a spillover that could have an impact on the economy, said Wang Lianzhou, a senior economist from Tsinghua University.

Many have called for the regulator to specify requirements for private banks' registered capital and operational scope, and to establish a clear set of rules under which private banks may be created and closed.

In practice, private investors must be able to handle risks, and a clear shareholder accountability and company governance mechanism should be in place to strengthen management and guard against moral hazards, according to Wang.

"Less hype and more concrete actions are needed, as we are still some way off the point where private banks can effectively serve the real economy," the economist added.

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