The People's Bank of China will also set up "market-based risk compensating mechanisms'' such as a deposit insurance system to protect depositors, the central bank said in its 2005 work plan released in Beijing.

``Currently, almost all Chinese lenders are state owned, so the government will foot the bill in the event of a bailout,'' said Liang Jing, a Shanghai-based analyst at Guotai Junan Securities.

``The new rules mean the government will encourage the setting up of more private banks, and make it easier for banks to go bankrupt.''

China is trying to boost the competitiveness of its domestic banking industry, and to prevent financial instability as the government prepares to remove restrictions on overseas lenders starting at the end of 2006 to meet World Trade Organization obligations.

China Banking Regulatory Commission chairman Liu Mingkang on Monday outlined a five-step plan to boost China's banking system by 2007. The plan includes improving corporate governance, risk management and banking supervision, while reorganizing banks and cultivating the rural banking market.

The government published rules promising to cover depositors' losses in the event of brokerage bankruptcies. China is also considering setting up funds to protect the interests of investors in the futures market and insurance policy holders.

The banking regulator will set up a credit database for this year as part of efforts to improve risk management in the nation's financial industry, according to the report.