CHINA has spelled out plans for a sweeping reform of its financial sectors as it works out ways for an efficient economic restructuring and upgrade.

The government has promised to encourage lending by banks to liquidity-starved small businesses, develop a full-fledged equity market, expand insurance coverage, and cut credit support to outdated manufacturing activities, the State Council said in a guideline released yesterday.

The measures are aimed to lift the quality of economic development by boosting finance for higher-end industries and cutting credits for industries plagued by overcapacity, pollution and high energy consumption.

"Financial operations are prudent overall, but irrational financing is still a problem in some sectors," the State Council said in a statement.

"To meet the demands for economic growth and drive restructuring, (we) need to deepen financial reforms and lift the quality of financial services."

The statement follows Chinese Premier Li Keqiang's recent push for reforms when he allowed the usual end-of-quarter money squeeze among banks last month to develop into China's worst liquidity crisis in a decade. Following that, Barclays Bank coined the word "Liconomics" to highlight the premier's policies that consists of no stimulus, deleveraging and structural reform.

The Standard Chartered Bank envisioned Li to be a firm reformer who is "willing to accept some short-term pain for long-term gains."

"China will not loosen its policies because of economic slowdown and will not tight up on a periodical boom of liquidity," the State Council said yesterday. "The government will improve distribution of financial resources, liquidize existent funds, make better use of new money, and effectively drive economic restructuring and upgrade."

It reignited fresh hopes that China will speed up previously stated financial reforms while tolerating economic slowdown.

"The guideline shows China's policy makers will focus more on economic restructuring to stabilize the economy rather than providing more liquidity to support economic growth," Li Huiyong, an economist at Shenyin Wanguo Securities in Shanghai, told Reuters.

In its best indication yet that private banks may well get the nod in near future, the State Council said, " The government encourage private capital to hold stakes in financial institutions and participate in their restructuring."

"(We) will explore to improve a graduated regulatory system to provide diversified inspection and entrance standards for different banks and financial institutions," it said.

It also promised reforms of the state-run banking industry, state support to struggling private companies and curb growing financial risks.

Last weekend, Shang Fulin, chairman of the China Banking Regulatory Commission, said that a "major breakthrough" regarding private capital investment in banks was in the works.

The government also said it would look for ways to channel the country's massive forex reserves to support Chinese companies' expansion overseas.