Experts warn of 'two-tier' dilemma

Some banking industry insiders have raised concerns about equality of competition between State-owned and private banks in China.

Jin Gang, a former account manager at a joint-stock bank based in Guangdong province, said he's worried that State-owned banks will have a monopoly on good projects concerning large enterprises, whereas private banks will be forced to rely on loans to small and medium-sized enterprises and their own shareholders. In the end, the private banks' ability to make a profit will be called into question.

"If the computer maker Lenovo opened a private bank, would that bank get business from the steel giant Shougang Group or other large enterprises in Beijing? I'm afraid it's very difficult, because the big State-owned banks have already loaned a lot of money to these enterprises. They dare not displease the big banks," he said.

However, as long as the government encourages fair competition, private banks will raise the standard of financial services by being innovative, said Jin, who believes the private banks will learn from the examples of other countries and adhere to advanced international banking standards.

"If they are doing really well, private banks will stimulate improvements in the Chinese banking system. Although they are not in a position to threaten State-owned banks, they will set a good example for the banking regulators at least," he said.

Currently, the central government provides commercial banks with an implicit deposit guarantee, irrespective of ownership or control. But some observers have suggested that if a private bank declares bankruptcy, its shareholders should be responsible for its deposits.

If the suggestion becomes a reality, it will cause serious inequality in the financial market by creating two types of banks with completely different credit systems - one guaranteed by the government and the other not.

Without the government guarantee, who will put their money in a private bank? That was the question asked by Zhou Xuedong, president of the Nanjing branch of the People's Bank of China, in an article published in China Finance magazine.

Zhou called on the government to launch a bank insurance system as soon as possible to protect clients from the loss of their deposits.