Report urges fast reform of financial system

"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.