Beijing Financial Street?(file photo)

China's top leaders are gathering in Beijing on Saturday for the four-day meeting known as the Third Plenary Session of the 18th Central Committee of the Communist Party of China (CPC).

In light of President Xi Jinping's earlier remark that the meeting would initiate extensive reforms in the spirit of past Third Plenums, there is much anticipation about what measures this Party session will introduce to reform China's financial system.

The CPC's 18th National Congress held in November last year emphasized macroeconomic stability and support for the development of the real economy through expanded reform.

It also proposed developing China's capital market on multiple levels, reforming interest and exchange rate policy to make rates more market based, gradually implementing capital account convertibility of the renminbi, and developing private financial institutions with better regulation.

Reform of the organizational system of finance, an essential precursor to further financial system reform is crucial if interest rate reform is to be effective.

The future of China's banking sector has been outlined by the Development Research Center of the State Council in its "383 Reform Agenda." Proposals include reducing government stakes in banks and keeping rapidly-growing private financial institutions in check.

This July, in a guideline on developing support for economic restructuring in the financial sector, the State Council clarified its ambition "to allow investments of private capital in setting up banks, and take on the risks that come with it."

The Governor of the People's Bank of China (PBC), Zhou Xiaochuan, recently also expressed his support for private banks, hoping that they will target small businesses.

Dong Wenbiao, Chairman of the China Minsheng Banking Corporation, who has frequently advocated establishing private banks, recognized the policy as a major breakthrough in introducing private capital to China's financial sector.

"There should be more private banks participating in further economic reform and restructuring. We should remove all obstacles preventing private capital from entering the financial and banking markets, and encourage reform of finance and investment," Dong said.

Such a transformation would improve support for the real economy from the financial sector, according to Wang Jinbing, professor at Renmin University of China.

"Private involvement in the financial sector is becoming a trend. It will help diversify ownership of financial institutions, and the resulting multi-level banking system will reinvigorate China's financial market," he said.

Official data and market responses both indicate that private capital is gradually entering sectors as diverse as finance, energy, railways and telecommunications.

Interest and exchange rate reforms have followed a similar, market-oriented pattern. In a floating interest rate scheme introduced last year, the PBC announced that the upper limit for deposit interest rates would be 1.1 times the benchmark interest rate and the lower limit for loan interest rates would be 0.7 times the benchmark interest rate.

This July, the 0.7-times interest rate limit on loans was abolished, indicating that the central bank has fully liberalized borrowing rates. The market is still waiting for the second phase of the policy -- the liberation of the upper limit for interest rates on deposits, however insiders believe that this may not be implemented for some time.

Chief China economist at JPMorgan Chase, Zhu Haibing, said that more liberal deposit rates could provide better savings protection. If China opens a capital account in the future, it will increase investment options -- which may relieve pressure on the real estate market.

Experts believe that removing interest rate restrictions and stimulating bond and futures trading would allow the market to play a greater role in allocating resources.

"Pressure from the slowdown in growth and greater financial risks mean that the traditional development model is no longer sustainable. China must rely on market-oriented reform to revitalize its economy," said Zhuang Jian, senior economist at the Asian Development Bank (ADB). He agreed such reform could help to diversify risks and support the transformation of the real economy. Deepening reform of China's financing system has become a focus for both policy makers and the general public, as it is not merely an essential part of government and economic structural innovation, but it will also influence China's future economic structure and growth pattern.

China's economy has not achieved its full potential, to a large extent because the role of the market in allocating resources has not been fully recognized. The report at the CPC's 18th National Congress reiterated that sorting out the relationship between the government and the market is an essential issue in economic reform.

In a later document, the central authorities proposed transforming the functions of the government by simplifying governance and decentralizing power. Li Pumin, Secretary-General of the National Development and Reform Commission (NDRC) said that relaxing the approval policy for lower ranking agencies is an ideal entry point in reforming the investment system.

The current Third Plenum has received enormous attention both within and outside China, as observers look forward to major developments that will guide China's economy smoothly on a healthy and sustainable path.