http://news.ft.com/cms/s/ae77647e-c8f7-11da-b642-0000779e2340.html

China may be willing to loosen its control of the banking sector by allowing the sale of controlling stakes in small and medium-sized lenders once owned exclusively by the government.

The new policy, announced in a weekend speech by a senior regulator, may also signal an increased willingness to open the sector to foreigners, many of whom want controlling stakes in the banks in which they invest.

Tang Shuangning, a vice-chairman of the China Banking Regulatory Commission, said: "The principle of state control only applies to large banks and not to small and medium-sized lenders."

These big banks are Industrial & Commercial Bank of China, China Construction Bank, Bank of China, Agricultural Bank of China and Bank of Communications. All except Agricultural Bank have sold minority stakes to foreign investors or have agreed to do so.

In addition to the "Big Five", China has over 100 city commercial banks and a number of so-called shareholding banks.

China has only a handful of privately held banks and has been wary of allowing entrepreneurial control of financial institutions out of concern that funds will be channelled improperly to the owners and their associates.

Foreigners are presently restricted to a maximum of 25 per cent equity in Chinese banks, with individual investors capped at 20 per cent.

The preference given to foreigners ahead of the local private sector has been one factor in a recent backlash against selling stakes in local companies to overseas investors.

However, Chinese officials have argued that foreigners' technological expertise and corporate governance standards are as important as the cash they bring to the deals.

Xie Ping, the head of a company under the central bank, which controls the large lenders, said at a recent internal conference that this expertise was an important factor in choosing a foreign investor for China Construction Bank.

According to notes of the meeting posted on the internet, Mr Xie said CCB could "buy off" the securities regulator with "two meals", but could never do the same with the foreign investor, in this case Bank of America.

The cap on foreign equity is being tested by Citigroup, which is leading a foreign consortium applying to buy 85 per cent of Guangdong Development Bank, in southern China.

The parlous state of GDB is believed to have prompted its owner, the provincial government, to support the foreign investment limit being waived for this deal, but top-level approval is still needed.

Citigroup is competing with France's Soci¨¦t¨¦ G¨¦n¨¦rale for GDB, but may be able to leverage the trip to Washington this month by Hu Jintao, China's president, to win approval.

Mr Xie said that Citigroup had not been able to buy into CCB because it had offered too low a price.