REUTERS/Jon Woo
An employee carries bundles of 100 yuan Chinese bank notes to store after counting at a bank in Taiyuan, Shanxi province July 4, 2013.
The China Banking Regulatory Commission (CBRC) would maintain "prudential regulatory standards" in approving private banks, it said in a statement following a meeting on banking supervision.
"The first-batch of three to five private banks will be set up under a pilot scheme," it said, adding that a private bank would be established only when conditions are mature. It did not elaborate.
Chinese leaders have pledged to open up the banking sector, now dominated by big state-owned lenders, to private investors to help boost competition and increase lending to small firms, who are often neglected by the big banks.
China Minsheng Banking Corp. <600016.SS> is the only private bank among the country's 10 largest commercial lenders.
Small- and medium-sized enterprises (SMEs) account for 60 percent of China's gross domestic product and some 75 percent of new jobs, but they are struggling to cope with weaker global demand and tight credit.
Retailer Suning Commerce Group <002024.SZ> and the Internet giant Tencent Holdings <0700.HK> are among firms keen to establish private banks.
The banking regulator also said it would take steps to rein in banking risks in 2014, and reiterated that it would take measures to resolve risks linked to local government financing vehicles and tighten rules on wealth management products.
Separately, banking industry sources told Reuters that Chinese banks made 8.9 trillion yuan ($1.5 trillion) in new loans in 2013, which implied around 500 billion yuan in new loans in December alone.
China's central bank is scheduled to release December's loan data between Jan 10 and Jan 15.
For all of 2013, Chinese banks' outstanding loan growth was 14.2 percent while banks' non-performing loan ratio stood at 1.05 percent as of December, the sources said, citing a speech made on Monday by Shang Fulin, the head of CBRC.
(Reporting by Victoria Bi in HONG KONG and Kevin Yao in BEIJING; Editing by Nick Macfie)