Jan. 12 (Bloomberg) -- China will allow domestic banks to invest in insurance companies, Yuan Li, assistant to the chairman of the insurance regulator, said.

Yuan, speaking at a conference in Beijing today, confirmed an earlier report by Caijing magazine, which said three to four banks would be allowed to buy stakes in insurers under a pilot program. The size of possible stakes was not determined, the Beijing-based magazine said, citing unidentified people.

``The government has been encouraging banks to expand their businesses and innovate,'' said Zhang Xi, an analyst at Galaxy Securities Co. in Beijing. ``Being able to develop insurance products will boost banks' earnings potential.''

China is letting state-owned banks widen their activities, including broking and fund management, to help them add new sources of revenue and boost profits, fending off increasing competition from overseas rivals that were allowed in December to start yuan-related businesses in all Chinese cities.

The move to allow investments in insurance companies may cause banks to rethink plans to set up their own insurance ventures, Caijing magazine said. Bank of China Ltd., China Construction Bank Corp., and Bank of Communications Ltd. have applied for permission to set up insurance ventures.

China's insurance market is growing as the nation's 1.3 billion people have more disposable income and are turning increasingly to private insurers to foot medical and retirement bills amid government cutbacks in welfare benefits.

China Life Insurance Co., the biggest insurer, and rival companies have combined assets of more than $300 billion.

To contact the reporter on this story: Zhao Yidi in Beijing at at yzhao7@bloomberg.net; Zhang Shidong in Shanghai at szhang5@bloomberg.net

Last Updated: January 12, 2008 03:33 EST