China is tapping Internet giants Alibaba and Tencent to take part in a pilot scheme to set up private banks.

They join eight other private companies chosen to set up private banks, a key reform measure aimed at further opening up China's financial sector.

Five private banks will initially be set up in Tianjin, Shanghai, Zhejiang and Guangdong, Shang Fulin, head of the Banking Regulatory body told reporters covering the annual parliamentary session on Tuesday. 

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The private banks will each be co-sponsored by at least two private capital providers, and shall be covered by the same regulation and supervision as commercial banks, Shang said.

Their financial services, however, will cater more to small and micro-businesses and residential communities, Shang added.

"A big problem of China's banking sector is that state-owned banks extend most of their lending to state-owned companies. It is very difficult for small and micro-sized companies and private firms to get a loan," said Shen Jianguang of Mizuho Securities.

Analysts welcomed the move saying key measures that allow private investors to enter the banking industry are long overdue.

China's regulators had announced last year that forthcoming financial reforms will pave the way for the creation of privately financed banks and give market forces a decisive role in shaping China's economy.