BEIJING - China is encouraging greater private and foreign capital involvement in the nation's hospitals and clinics as part of a health system reform program that aims to make affordable healthcare available to China's 1.3 billion people.

The State Council, China's cabinet, issued a circular Friday asking governments at all levels to simplify procedures to facilitate private and foreign investment in the healthcare sector currently dominated by public hospitals.

The announcement drew acclaim from foreign-funded and private hospitals as well as from healthcare officials and experts.

The new policies are crucial for ensuring increased demand for medical services is met as the country industrializes and urbanizes, said Zhou Qiren, director of the China Center for Economic Research (CCER) at Peking University.

"Supply of medical services still falls short of demand, and the shortfall is very severe at the moment," Zhou told Xinhua News Agency on Thursday in an interview.

In a previous report, Zhou noted that Chinese individuals' expenditure on healthcare increased 200 times between 1978 and 2005 while the number of medical institutions and personnel rose about three quarters in the same period of time.

"The move will promote the reform of public hospitals and the establishment of a modern healthcare system because a diversity of medical institutions will enhance competition in the sector," Zhou said.

China's public hospitals in big cities like Beijing and Shanghai are often overcrowded with patients having to wait in long queues.

On the other hand, community and rural clinics are rarely attended as they lack of facilities and experienced doctors.

In 2009, the Chinese government began a three-year healthcare reform program designed to provide across-the-aboard healthcare services, especially in China's rural areas, where finding a doctor is more difficult.

The reforms focused on five aspects of the medical system: community and rural medical service, public sanitation, drugs, health insurance and public hospitals.

"Reform of public hospitals is difficult as various stakeholders have interests," said a Ningxia Hui Autonomous Region healthcare official who requested anonymity.

"The population should be provided with a good, affordable healthcare system," said the official, noting that it is important for the government to coordinate the interests of patients and hospitals during the reform.

The Chinese government has been working to extend health insurance to the nation's vast rural areas that were previously neglected.

The government pledged last year to invest 850 billion yuan ($128 billion) in the healthcare system over three years.

Industry players say the entrance of private and foreign capital in China's medical sector will affect the nation's healthcare system.

"The government's move to focus on ensuring basic healthcare for its citizens while relying on private capital to serve people seeking premium healthcare services makes a lot of sense," said Roberta Lipson, president of Beijing-based United Family Healthcare (UFH).

Founded in 1997, UFH has become China's largest foreign-funded hospital offering premium medical services. Its customers are mostly foreigners in Beijing.

Lipson said policies that ease restrictions on overseas investment will help develop China's healthcare industry.

"Healthcare is a challenge for every government. It is even more of a challenge for China given its large population, and so involving private and foreign resources is necessary," she said.

UFH has two hospitals, one in Beijing and one in Shanghai. Its parent company Chindex International now hopes to take advantage of the eased restrictions to open more UFH hospitals in major and second-tier cities like Guangzhou and Tianjin, said Lipson.

While the high-end hospitals will mainly cater to the needs of well-off groups, basic healthcare in underdeveloped regions will also be partly provided by private hospitals and clinics.

"Private hospitals and clinics will boom now that the government is encouraging private capital to be more involved in China's healthcare sector," said Yu Zonghe, director of the private hospital branch at the China Hospital Association (CHA).

"However, more hospitals does not necessarily mean better quality hospitals," said Yu, referring to the quality of some small-scale private hospitals and clinics which are often viewed with skepticism.

"There is a prejudice against private hospitals. They themselves caused their bad reputation," said Ho Gwo-hao, special assistant to the chairman of the board of Xiamen Chang Gung Hospital in Southeast China's Fujian province.

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Xiamen Chang Gung Hospital, the first Taiwan-capital funded private hospital on the Chinese mainland, has been tremendously successful and well accepted by local residents.

The hospital was even included in Xiamen city's health insurance system, a rare feat among the nation's 5,000-plus private hospitals.

"It's time for private hospitals to rebuild their image and regain people's trust," said Ho.

Besides, said CHA's Cha, government supervision is important for the healthy and sustainable development of private hospitals and clinics.