Chinese regulators have expanded a pilot plan allowing banks to package loans into tradable securities to include foreign banks, sources said.

Chinese policymakers see securitization as a tool to shift risk away from the banking system to reduce the chances of a financial crisis as economic growth slows and bad loans rise.

Securitization would also help satisfy investor demand for alternatives to the chronically weak stock market and frothy property sector.

Chinese Premier Li Keqiang told a cabinet meeting in late August that China would aggressively expand the securitization of credit assets.

The central bank launched a pilot program in 2005 to allow banks to package loans into bond-like securities known as collateralized loan obligations (CLO).

Authorities have moved slowly on the pilot program though partly in the knowledge that the collapse of collateralized debt, backed by US mortgages, triggered the global financial crisis.

The CLO products available in China make up a tiny fraction of the overall loans market and the involvement of foreign banks will not change that ratio since they hold less than 2 percent of bank assets.

The pilot expansion will be limited to small-scale deals, two sources with direct knowledge of the plan said. Recent deals by domestic banks have ranged from 1-to-10 billion yuan ($164 million to $1.64 billion).

The expanded program is open to all of the 42 foreign banks with locally incorporated branches in China, a grouping that includes HSBC Holdings, Standard Chartered PLC and Citibank.

"Our company is preparing a plan for (securitizing) financial leasing (assets)," an executive at a foreign bank said. The sources declined to be identified because the expansion of the pilot program has not been officially announced.

Securitization is unlikely to significantly boost foreign bank profits in the near term, but their participation could held China's broader securitization drive.

"If Standard Chartered or HSBC issued a CLO product, its underlying credit assets would probably come mainly from foreign firms, so the asset pool would be more transparent," said a foreign bank executive who previously participated in early CLO deals at a Chinese bank.