Such products would likely be attractive to investors and would therefore serve as a model for domestic lenders to follow, the executive said.

However, foreign banks controlled 1.9 percent of total Chinese banking assets at the end of 2011, according to accounting firm PwC, indicating they have only a limited pool of loans available to create CLOs.

Market participants have previously said lack of transparency of underlying assets is a key barrier to faster growth of securitization in China. Investors are wary of buying assets if they lack the information necessary to assess risks.

Slow progress

About 90 billion yuan ($14.8 billion) of CLO products have been issued in China's interbank market since 2005, according to Reuters calculations based on central bank statements.

That is a tiny fraction of the 70 trillion yuan in local currency loans outstanding at the end of September.

Securitization deals were halted during the financial crisis. The pilot resumed in 2011.

Under the expansion, regulators have asked foreign banks to submit preliminary plans for securitization, the sources said. Once they have received feedback on the preliminary plans, the banks can formally apply for permission to execute the deals.

Banks will be able to choose whether to issue the securitized assets into China's interbank market, where more than 95 percent of all domestic bonds trade, or on the stock exchange, where a small minority of bonds also trade.

Securitization in China has also been hindered by the existence of three separate pilot programs, each controlled by different regulators.

In addition to the CLO program, the China Banking Regulatory Commission overseas an asset management pilot, while the National Association of Financial Market Institutional Investors, overseen by the central bank, is in charge of a program for asset-backed notes.