BEIJING - East China's city of Wenzhou should relax control over the entry of private capital into the financial sector in order to create sufficient competition, a bank official said Wednesday.

Zhang Jianhua, head of the research bureau under the People's Bank of China, or China's central bank, said the city, which has served as a "trial area" for financial reform, is being confronted with two major issues.

For one thing, the people of Wenzhou have an abundance of private capital but have difficulty investing it, Zhang said. In addition, small- and medium-sized enterprises have had problems securing financing.

"To solve the problems facing Wenzhou, they should loosen up (private capital's) entry and push forward the formation of a lower-level financial service system featuring effective competition," Zhang said.

In late March, China approved a plan to set up a pilot zone in Wenzhou to regulate private financing activities, as underground private financing activity in the city has stirred up both financial disputes and crime and threatened financial and economic stability.

According to the trial program, the government encourages and supports the participation of private capital in the reform of local financial institutions by setting up or taking shares in rural banks and credit companies.

Private funds will also be guided toward the establishment of venture capital and private equity activity, as well as other types of investment.

Zhang said Wenzhou should improve the ability of the financial industry to serve the real economy and forge ahead with the city's economic transformation.

"After years of reform and development, the financial sector's capability to serve China's real economy has been greatly promoted, but financial services at the lower level, especially at the county level, are suffering from insufficient competition and relatively weak service," he said.

Promoting sufficient competition in the lower levels of the financial sector will allow people in small cities and rural areas to enjoy banking services that are similar to those enjoyed by people in major cities.

Free market entry is a basic rule of market economics, Zhang said, adding that Wenzhou should consider relaxing private capital's entry into the financing sector, especially for small- and medium-sized institutions, to ensure effective competition.

"Generally speaking, the establishment of a financial institution should be granted if the applicant has qualified management personnel and enough capital to meet regulatory requirements, as well as corresponding risk control and management information systems," said Zhang.

Zhang also urged the government to reinforce supervision to keep up with the development of the financial industry.

"We cannot allow a lack of supervision to restrain the supply of financial services and further check the growth of the real economy," he said.

During a trip to Wenzhou last week, central bank governor Zhou Xiaochuan urged the city to encourage private capital to flow into its financial sector.

The pilot zone should encourage and guide private capital to enter the financial service sector, ensure smooth access to investment channels for private capital and improve financial services for small- and micro-sized enterprises and rural areas, Zhou said.