China's banking industry watchdog has issued guidelines to encourage and regulate financial innovation by commercial banks.

The guidelines take effect on Dec. 11, the day on which China will open its banking sector to foreign investment in line with its commitment to the World Trade Organization.

Tang Shuangning, vice chairman of the China Banking Regulatory Commission (CBRC), told a press conference on Wednesday that the guidelines are the first general document issued by China's banking regulator concerning financial innovation by commercial banks.

According to Tang, domestic banks lag behind foreign banks in financial innovation and the CBRC wants to encourage them to spread their wings.

He said non-interest income generally accounts for over 50 percent of the total revenue of major world banks, but the highest rate in China's commercial banks is less than 30 percent.

Tang said China's banking industry must learn to compete with foreign counterparts in the field of financial innovation.

The CBRC will set up a legal environment that allows both Chinese and foreign invested banks to launch new financial services.

Improving the risk-control capability of commercial banks is another emphasis of the guide, he said.

The guide clarifies the obligations of commercial banks to consumers, including fair and correct disclosure of information, professional counseling services and an effective consumer complaint system.

The guide also requires commercial banks to fully inform consumers of the risks of investing in financial products.

According to Tang, the CBRC has issued a series of rules concerning derivatives trading, electronic banking services and financial consultation for individuals.

62 commercial banks are authorized to trade derivatives in China with total turnover reaching 14 trillion yuan last year. Electronic banking transactions are up to 100 billion yuan and 1.03 billion bank cards have been issued.

Tang also said that the government will adopt a tolerant attitude towards risks caused by financial innovations.

"We can not blame the pioneers in financial innovations as the Chinese banks do not have many experiences in the area," he said.

The official said they would be tolerant for indeliberately caused risks, but concerned regulations would be improved.

Chinese banks used to rely on interest rate difference to make profits. After China fully opens its banking sector on Dec. 11, the Chinese banks should lay more emphasis on how to start new financial services to face competition against their foreign counterparts, said Tang.

Chinese residents, who are getting richer, are no longer satisfied with the simple saving and loan services in the banks. There is a demand for financial innovations, he said.

The official also said that a mechanism would be developed to relieve commercial banks of risks in launching new financial services.

Ceiling on Foreign Holding of Domestic Banks to Remain

China has not considered breaking caps on foreign holding in Chinese banks so far, said Tang at the press conference.

"The ceiling has not been in place for long and it well adapts to the current situation of the Chinese banking industry, so we will keep the policy stable for a period," Tang said.

To support the opening-up of the banking sector, China has adopted measures to allow foreign participation in Chinese lenders. But it stipulates that a single foreign bank can not hold a stake of more than 20 percent in a Chinese lender while there is a 25 percent cap on all foreign holding in one Chinese lender.

Tang said the measures have helped bring in strategic investors, conduct the stock-holding reform and improve the corporate governance of Chinese banks.

It has also proven to be effective in strengthening supervision over and preventing risks of Chinese lenders, he said.