China's economic rebalancing will rely on market-oriented and in-depth reform of its financial systems to attract investment into more efficient private sectors, according to a report.
The National School of Development at Peking University said on Thursday legalizing and regulating a credit scheme outside the main banking system, as well as liberalizing interest rate fluctuation should be at the core of any reform.
"The main orientation should be encouraging non-bank lending businesses to compete with traditional banks, to provide market-based capital pricing for more small and medium-sized enterprises," its report said.
"A market-oriented interest rate regime is seen as a premise to free cross-border capital flows, and the relocation of resources between industrial sectors and service businesses."
In addition, a more competitive credit system will curb any exacerbation of non-performing loans, it said.
Zhu Haibin, the chief Chinese economist with JPMorgan Chase, wrote in a recent research note that rapid expansion of financing outside the banking system has raised market concern since the fourth quarter of last year, fueling a faster growth rate in the all-system financing aggregate than for bank loans.
He said the recently released policy to control "non-standard" credit products was likely to reduce potential default risks while moderating economic recovery.
Song Ligang, a senior researcher with Australian National University, said that financing provided by big banks to State-owned enterprises has fostered excessive production capacity and intensified the imbalance of China's economic development.
"The local government impulse of stimulating GDP growth is still pouring funds into capital-intensive State-owned enterprises, such as the iron and steel producers, with no consideration of the actual market demand-supply situation.
"State-owned enterprises can receive government subsidies even when they suffer losses because of excessive production capacity," Song said.
The official Purchasing Managers' Index in March was 50.9, up from 50.1 in February, a weaker-than-expected rebound, which suggested that market supply is still way outstripping demand.
According to the National Bureau of Statistics, the March Producer Price Index continued to drop, by 1.9 percent from a year earlier, compared with a decline of 1.63 percent in February and 1.64 percent in January, indicating increased industrial profit growth pressure.
The efficient allocation of resources, especially financial capital, will significantly influence the transformation of the economic growth pattern, said Song.
"Financial reform is entering a crucial stage which needs stronger determination from policy makers."
Zhang Xiaobo, an economics professor at Peking University, said a more efficient and more open financial system could help Chinese enterprises transfer any excessive production capacity overseas.
"For example, China could help African countries accelerate infrastructure construction, such as building railways, highways and harbors, and stimulate overseas direct investment," he said.