For the first time in almost two decades, the nation's banking sector is set to get an infusion of private capital with the foundation of five institutions to be formed by entrepreneurs.

Regulators hope these new banks will provide more financing for cash-starved small companies and more competition for mammoth State-owned banks.

Ten private enterprises will "test the waters" in Tianjin and Shanghai, plus the provinces of Zhejiang and Guangdong, said Shang Fulin, head of the China Banking Regulatory Commission, on Tuesday.

The companies will establish five private-sector banks, Shang told a news conference on the sidelines of the 12th National People's Congress. Shang didn't release the names of the proposed banks, but he said each bank will presumably be led by two participating companies.

The licensed companies include Tencent Holdings Ltd and Alibaba Group Holding Ltd, both of which have aggressively rolled out wealth management products online, and two conglomerates - Fosun Group and Juneyao Group.

The CBRC said the chosen companies are financially sound, have strategies to differentiate their banks in the market and are capable of hedging risks.

These private banks will be the first to be formed since 1996, when China Minsheng Banking Corp was established.

Approval of the banks is a milestone in opening up a sector now dominated by State-owned institutions.

A Tencent-led bank will be established in the Qianhai experimental zone in the southern city of Shenzhen, a Tencent spokesman told China Daily via e-mail.

Shenzhen was the country's first special economic zone, established at the dawn of the era of reform and opening-up that began in the late 1970s.

"Teaming up with Shenzhen Baiyeyuan Investment Co Ltd, Tencent will leverage its existing advantages in Internet finance and launch more innovative and efficient financial services for customers," Tencent said in a statement.

Tencent's interest in private banking may tie into its Tenpay online payment system, which allows digital transactions for its popular mobile chat app WeChat.

Competitor Alibaba, which runs the country's largest e-commerce site, applied for a license via its affiliated Small and Micro Financial Services Group, which includes online payment unit Alipay and its shareholding in Alibaba's Zhongan Insurance and Tianhong Asset Management Co.

"We joined with China Wanxiang Holding Co Ltd to make the application. We are making preparations and have no further information to share at this stage," the company replied in response to a query from China Daily.

Wanxiang belongs to China's biggest vehicle parts manufacturer, the Wanxiang Group. Alibaba and Wanxiang are both based in Hangzhou.