Non-bank lenders to be allowed to compete with traditional players

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.