China is set to allow private banks to play a bigger role, a key move for its financial system reform despite the government's plans to impose restrictions on them. On March 11, the China Banking Regulatory Commission (CBRC) named ten companies, including Internet giants Alibaba and Tencent, to set up five privately owned banks with two co-sponsors for each bank. Regulators had announced last year that Beijing would allow the creation of privately financed banks as part of the effort to make the economy more productive by giving market forces a bigger role. The news was followed by the country's central bank cracking down on Tencent's and Alibaba's online payment businesses. The regulator also plans to impose restrictions on transfer amounts through the third-party online payment servers, potentially hurting Internet finance. Limitations In one example, Alibaba's bank, which will be created in cooperation with China Wanxiang Holding Co., China’s biggest auto-parts manufacturer, will impose limits on the deposits it can bring in from any company or individual and how much it can lend to any one borrower. While Tencent's bank will be able to take in large-scale deposits, but only make small-scale loans. The government wants to reduce the burden that the banks bear from booming Internet finance and maintain the stability of the banking system, even though China’s leaders have felt the looming risks generated by huge local government debts and shadow banking. Economists have long decried the tendency of China's state-dominated banking system to grant loans primarily to large state-owned firms, even as small and medium enterprises account for 60 percent of gross domestic product and around 80 percent of new jobs. “Financial parasites” Lack of lending by state banks to entrepreneurs has fueled growth of an underground market of high-interest loans. Regulators permitted the market to exist in order to support private business, but more recently have tried to tighten control over it after discovering state companies and banks were involved. Foreign-owned banks still face a strict operating environment and have a tiny share of the country’s deposits. Many who fail to get access to formal bank financing resort to high-interest loans, part of the country's worrisome shadow banking sector. Alibaba Group is one of the world's biggest e-commerce companies, and Tencent Holdings Ltd. is China's most popular social networking and online games server. Both have launched online financial services that have drawn deposits away from banks by paying higher interest. Premier Li Keqiang pledged in an annual policy speech to promote growth of online financial services. The traditional banking industry accuses them of hurting state banks. State-owned China Central Television's securities channel chief commentator condemned Alibaba’s investment fund Yu’e Bao as “vampire” and called for a ban over it: 余额宝是趴在银行身上的“吸血鬼”，典型的“金融寄生虫”。它们并未创造价值，而是通过拉高全社会的经济成本并从中渔利。它们通过向公众输送一点点蝇头小利，为自己赢得了巨额利润，同时让全社会为之买单。 Yu’e Bao is the “vampire” feeding on banks, the typical “financial parasite”. They don’t create value, but instead benefit from increasing economical costs of the whole society. They’ve gained huge profits by funneling tiny benefits to the public while society foots the bill. His words quickly sparked retorts online, and some experts countered that it is the banks that are the true “vampires” feeding on the public. Liu Shengjun, a popular economist and reformist responded by decrying how China banking system is lagging: 刘胜军：【中国银行业＋中国股市＝无耻＋无能】我认识的几乎每个朋友、同事，都在为如何不让存款贬值而愁白头，我认识的几乎每个民营企业家都悲叹融资难、融资贵。影子银行、互联网金融大爆炸，反证了中国银行业与股市的无能与无耻，已沦为吸血鬼，吸的是普罗大众的血、实体经济的血。坚决支持余额宝革银行的命 China’s banking industry + China’s stock market = impudence + incompetence. Nearly every friend and colleague of mine is worried about how to prevent their deposits from devaluation. Nearly every private entrepreneur I know is complaining about the difficulty and high costs of financing. The shadow banks and Internet finance boom have proven the incompetence and impudence of China’s banking industry and stock market, which have ended up as vampires feeding on blood of the public and real economy. Stand firmly with Yu’E Bao to overthrow traditional banks! Ma Guangyuan, another famous economist, argued that the outdated state banking system has hampered economic growth: 马光远：影子银行的扩张、产能过剩的痼疾，以及中小企业长期制度性的融资难题，根子都在于金融改革的滞后和金融垄断。垄断的国有银行体系既无法满足实体经济的需求，更无法保证中国金融系统安全，反而成了中国金融最大的体制风险。 The expansion of shadow banks, the chronic disease of over-capacity and the financing problems for small and medium enterprises are rooted in the financial monopoly and the lag in financial reform.