China has approved the setting up of three private banks, including one by Internet giant Tencent, the industry regulator said Friday, in a long-awaited economic reform aimed at bringing competition to state banking giants.

Previously, China had just two privately-owned banks, Minsheng Bank and Ping An Bank, according to state media.

The China Banking Regulatory Commission (CBRC) said it had approved private banks in the southern boomtown of Shenzhen, the northern port city of Tianjin and the eastern city of Wenzhou, which is known as the cradle of private enterprise in China.

The move followed a declaration by the government in March that it would reform China's banking sector, which is dominated by four state-owned banks -- though all of them have minority shares listed on the stock market.

"The target is to provide efficient and diversified financial services to support the development of the real economy," CBRC chairman Shang Fulin was quoted as saying in a statement.

Tencent, parent of China's most popular messaging app WeChat, said it would take a leading role in the establishment of a new bank in Shenzhen, where it is also headquartered.

"Our English name is 'Webank', 'We' stands for group innovation spirit," Tencent said in a separate statement.

Two local investment firms, Shenzhen Baiyeyuan Investment Co. and Shenzhen Liye Group, will also fund the new bank along with Tencent, the CBRC said, adding the new lender will be tailored for retail customers and small firms.

But Tencent's rival Internet giant Alibaba apparently lost out in the race to be among the first to open new private banks.

The e-commerce firm, which is preparing for a multi-billion dollar share offer in the United States, earlier said its micro-finance unit was applying for a banking licence, but it was not among the initial approvals.

Chint Group, an electrical equipment producer, and Huafon Group -- whose business ranges from new materials to finance -- will sponsor the Wenzhou bank, which will serve local companies.

Two diversified companies, Maigou Group and Huabei Group, will set up the third bank in Tianjin with a focus on corporate banking.

Maigou operates in commercial property, retail and finance. Huabei is engaged in electrical cable production, property, finance and logistics.

State media also reported in March that Shanghai-based conglomerate Fosun had also submitted a plan to set up a private bank.