Beijing's policy of state control would only apply to Bank of China, Agricultural Bank of China, Industrial and Commercial Bank of China, China Construction Bank Corp. and Bank of Communications.

"The state control principle only suits large banks and won't apply to small-and medium-sized lenders," Tang Shuangning, vice chairman of the China Banking Regulatory Commission, was quoted by the Securities Times as saying, clarifying recent official statements on the policy.

Premier Wen Jiabao said on March 14 the Chinese government must keep control over its state-owned banks to minimise the risk of losses while the financial system was being reformed.

The official comments have come after criticism that China is selling stakes in the country's banks too cheaply and ceding too much influence to foreign investors, and so loosening state grip on the levers of power.

The Shanghai Securities News quoted Tang as saying that China's banking sector was now crowded, and regulators would be cautious in granting approval for new lenders.

"We must be cautious about the entry of new institutions into the industry so as to protect the interest of depositors and prevent financial risks," Tang was quoted as saying.

In addition to the five major state-owned banks, China now has about a dozen stockholding lenders and more than 100 city commercial banks.

Criticism of the way bank reform is being handled has gathered momentum since China Construction Bank's $9.2 billion IPO in Hong Kong last October. Bank of China is believed to be planning to raise about $8 billion in a Hong Kong IPO in May.

Industrial & Commercial Bank of China, the country's largest lender, hopes to follow by the end of the year with an IPO that bankers say could raise $10 billion or more.

All three lenders have sold shares prior to their listings to foreign strategic investors to draw on their expertise.

This is adding to the resentment of critics, who say Chinese funds and individuals -- essentially barred by capital controls from buying shares abroad -- are being deprived of the chance of investing in banks that the government has nursed back to health at the cost of tens of billions of dollars.

Many bankers consider a recent bid by Citigroup to buy an 85 percent stake in China's Guangdong Development Bank as an early litmus test of whether China will be willing to relinquish more control over the country's smaller banks.

The bid would require special regulatory approval because foreign investors are usually limited to buying 25 percent of a Chinese bank, or else the domestic lender will be turned into and treated as a foreign bank.