'You have to allow banks to try and fail. You cannot kill them for making just little mistakes or failures, because banks can only succeed after they have learned from their mistakes,' Mr Li (left) told a forum yesterday in Beijing.

Mr Li, who emphasised he was speaking academically, said the mainland's banking regulatory mechanism could not meet modern supervisory requirements at a time when most state-owned banks had transformed into commercial banks and had listed on the stock market.

Supervisors preferred administrative measures because they had immediate effect, while monetary policy took longer to have an impact.

Mr Li, a member of a Chinese delegation to a strategic dialogue between the mainland and the United States earlier this month, did not try to hide his admiration for the US-style market supervision.

'When central bank governor Zhou Xiaochuan brought the relation between subprime loans and supervision up in the discussion, US Treasury Secretary Paulson immediately argued that tighter regulations would kill the creativity of US financial institutions,' Mr Li said.

He said a supervisory environment which did not discourage financial creativity had made the US financial system the best in the world.

Li Yang, a director of the Finance Research Centre at the China Academy of Social Science, told the forum that development of the mainland's financial sector had been slowed by the supervision mechanism. 'Too many authorities and supervisors have divided the market into separate sections and it creates too many problems and low efficiency.'

Mr Li also said the key to better market supervision was to let the market play a centre role.

'You have to forfeit your long-held belief that 'we can control the market' and let the market run by its own rules and work everything out,' he said.