China said on Tuesday it would allow, for the first time, the setting up of five private banks on a trial basis, and also move to liberalise deposit rates in the next two years, as regulators grapple with the rising pressure on the banking sector from a newly booming online finance industry.

The head of the China Banking Regulatory Commission (CBRC), Shang Fulin, told reporters here the first five private banks would be set up in Tianjin, Shanghai and the provinces of Zhejiang and Guangdong as a pilot project. The CBRC would work with ten private firms, including Internet giants Alibaba — the e-commerce giant — and Tencent.

He said the banks would be subject to the ‘same regulation and supervision’ as existing state-run banks, but would be focused more on small and medium enterprises. SMEs have complained of the struggle to obtain financing from the major banks, which tend to lend preferentially to other state-owned enterprises — an increasing source of frustration for entrepreneurs here.

In another deregulatory move, the governor of the Chinese central bank, Zhou Xiaochuan, said on Tuesday China would also loosen its grip on deposit rates in the next two years and move gradually towards liberalising interest rates.

The moves come amid a churn in China’s banking sector, driven in part by an unprecedented expansion of Internet financing products in recent months.

Only this week, the Alibaba-created Yu'ebao fund, which offers a 6 per cent annualised yield — almost double that offered by state-run banks — was reported to have garnered a remarkable $500 billion in capital in the nine months since its founding last June.

A research report this week said Yu'ebao, as of last month, had 81 million investors, surpassing the stock exchanges of Shanghai and Shenzhen, who list 67 million and 65 million shareholders.

The flexibility and ease of using Yu'ebao has prompted many Chinese to pull deposits out of the ‘big four’ traditional state-controlled banks — the Bank of China, the Industrial and Commercial Bank of China, the China Construction Bank and the Agricultural Bank of China.

Among Yu'ebao's new users is one Beijing-based construction executive, who said, he was moving a sizable amount of his savings because of the low rates offered by the major banks. The ease of managing one’s account through sophisticated Yu'ebao applications was another attraction, he added.

“This is also more stable than other high risks products that are now getting into trouble,’’ he said, referring to recent defaults of high-profile trust products linked to real estate and steel sectors.

But one downside, he said, was the daily limit of depositing only 50,000 yuan (Rs.5 lakh).