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China released a long-expected regulation Sunday to allow some pilot commercial banks to launch fund management companies, clearing the major policy obstacles for the reform.

The regulation, issued jointly by the China Banking Regulatory Commission (CBRC), the People's Bank of China (PBOC) and the China Securities Regulatory Commission (CSRC), will enable commercial banks to step into the securities investment business, a major breakthrough in the segregated regulatory scheme of the banking, securities and insurance sectors.

Before, domestic banks could only sell funds or provide custody services, but were not permitted to be involved in investment sales, according to a China Daily report on Monday.

The regulation clarified application procedures for commercial banks that want to set up fund management companies and also set guidelines to regulate risk controls, affiliated trade and the daily operations of new fund companies.

Banks that are interested in investing in the fund management business should first apply to the CBRC and PBOC and then undergo examination of CSRC to receive licenses.

The regulation said the fund companies initiated by the commercial banks should have diversified equity structures. CBRC officials said earlier that domestic banks are encouraged to introduce foreign strategic investors to jointly invest in the fund management companies and domestic private investors can also pitch in.

A number of commercial banks have already submitted initial applications to invest in the fund management business, a spokesman for the three financial regulators said on Sunday. He said the regulators would start reviewing applications very soon. They would take the performances of the banks into consideration when choosing the pilots, who can either directly launch a new fund company or have their subsidiaries invest in the company.

Senior officials of the Industrial and Commercial Bank of China and China Merchants Bank, two ideal candidates for the pilot program, have expressed interest in the fund business and said they will implement their plans once the official procedures and standards are clarified.

Though the innovation is expected to bring new profits for banks, potential risks remain a common concern, the new regulation said.