China’s premier has called for more private banking licences to be issued in a bid to boost the market and move forward his liberalisation campaign.

The expansion of the banking sector has been seen as part of an attempt to shift capital allocation to the private sector and reduce the economy’s reliance on lending from state firms.

The premier also indicated that reform of the financial sector remains a priority and that certain projects, including the Shenzhen-Hong Kong Stock Connect scheme, are to move ahead.

Li Keqiang delivered his wide-ranging work report to the National People’s Congress yesterday, as legislators gathered for the opening of parliament’s annual session.

Julian Evans-Pritchard, China economist at research firm Capital Economics, said Li’s speech was a clear signal for banking diversification.

“The work report says there should be a stepping up of approvals for private banks,” he said. “The clear message is that any application that meets the requirements should be approved.”

China’s expansion of the banking sector is part of a continued liberalisation of financial markets that includes allowing digital media companies such as Tencent and Alibaba to set up financial services operations.

Tencent’s WeBank is already up and running in China, while Alibaba has received approval for a private bank operation. It established Ant Financial group last October, describing it as a 'private financial servicing institution'. Evans-Pritchard said that Baidu and Suning also have plans to launch private banks.

“We are expecting a few more private bank licences to be granted this year,” he added. “We think this could help improve the capital allocation to the private sector and shift lending away from the state firms.”

Reform of the banking sector has been partially held up by the stalled introduction of a deposit scheme. The proposed scheme would insure deposits up to Rmb500,000 ($80,000), which Evans-Pritchard said would cover more than 99% of depositors.

“The deposit scheme is a key step to preparing the financial landscape for the increased competition between banks that will inevitably arise from liberalising deposit rates and introducing more private banks,” Evans-Pritchard said.

“It looks like it will be introduced soon. It was mentioned in the November work report, so that indicates progress is being made.”

In the context of a continued liberalisation of financial markets and foreign investment rules, Li also mentioned that progress should be made on the introduction of the Shenzhen-Hong Kong Stock Connect scheme “on a trial basis and at an appropriate time”. Evans-Pritchard said the comments indicated the new cross-border trading link would open later this year.

Li also signalled a determination to reduce red tape and pledged to halve the number of industries in which foreign investment is restricted.

Overall, Capital Economics said that the work report sent ‘strong signals on financial reform’.

“China appears to be moving in the right direction on reform and rebalancing and seems to have accepted that, although this will improve China’s prospects in the long-run, it inevitably means slower growth in the short-run,” Capital Economics said.