Detailed rules should be issued quickly to support the establishment of private banks in Wenzhou, or the pilot plan won't change the situation much, industry insiders said on Thursday.

The State Council on Wednesday approved Wenzhou in eastern Zhejiang province, a city with strong private capital reserves, as a "pilot zone" for financial reforms.

The council said it encourages and supports private capital to participate in the reform of local financial institutions, to set up or take shares in village banks, lending companies and rural financial cooperation funds in accordance with the law.

"Small loan companies that meet certain requirements can be restructured into village banks," the council said.

However, Zhou Dewen, chairman of the Wenzhou Small and Medium-sized Enterprise Development Association, said: "It is not clear in this plan who will be responsible for the examination and approval of local financial institutions.

"If setting up village banks or lending companies still requires central bank approval, then there is actually no breakthrough", he said, adding that the authorities should define what kind of companies can be restructured into legal financial institutions.

Royal Bank of Scotland analysts put the size of total non-bank lending in China at 12 trillion yuan ($1.9 trillion), and underground lending at about 4 trillion to 4.5 trillion yuan, compared with total bank loans outstanding in August of 52.4 trillion yuan, The Wall Street Journal reported at the end of last year.

The process of legitimatizing informal finance institutions may require giving existing underground lenders a license to operate as small-loan companies while imposing deposit collection requirements, Zhou said.

He said the Wenzhou authorities should be authorized to carry this out. "A local financial supervisory service center has been set up. It will be efficient to help restructure the underground lending companies," he said.

Wang Songqi, deputy director of the Institute of Finance and Banking under the Chinese Academy of Social Sciences, said the phrase "set up financial institutions in accordance with the law" deserves further elaboration".

"If private capital can work as the real initiator of the new kind of financial institutions, then there is great progress in this pilot program. Otherwise, it's just an extension of the current policy," he said.

The current policy stipulates that to set up a village bank, the biggest or sole shareholder must be a banking financial institution, which thwarts the entry of private capital.

Also, interest rate liberalization, which was contained in the proposal submitted by Wenzhou authorities, was not included in the State Council's pilot plan.

"It is a pity that it was not passed this time," Zhou said.

xieyu@chinadaily.com.cn