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Jul 1, 3:16 AM EDT

World Bank urges China to embrace basic financial reforms

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BEIJING (AP) -- China needs fundamental reform of its state-dominated financial system to keep economic growth on track, the World Bank said Wednesday.

The communist government needs to address wasteful investment, over-indebtedness and weak regulation of its shadow banking system, the bank said in a report. It said failure to do that could "deflect the economic trajectory."

The recommendations echo private sector analysts who say Beijing needs to overhaul a government-run banking system that subsidizes state industry at the expense of savers and that provides little credit to entrepreneurs and emerging industries.

"China has reached a critical phase of its economic and social development path," the World Bank said. The financial system "will need to be transformed to increase the efficiency of new investments and widen access to finance, enabling China to sustain solid growth and rebalance its economy."

The bank said it expects China's economic growth to decelerate this year to 7.1 percent from last year's two-decade low of 7.4 percent. It said growth should decline further to 6.9 percent by 2017.

The communist leadership is in the midst of a marathon effort to make China's economy more efficient and productive, in part by giving entrepreneurs a bigger role. The leadership has promised to make the banking system more market-oriented but has taken only modest steps to ease controls on interest rates and increase lending to the private sector.

Beijing needs to separate its roles as owner of China's banks, regulator and strategic planner and to construct a system that channels more lending to productive industries and manages risks better, the World Bank said.

The Chinese state has formal ownership of 65 percent of commercial bank assets and de facto control of 95 percent of assets, according to the report. It said that while some other countries have state-owned banks, China's entire financial system is government-dominated.

"Instead of promoting the foundations for sound financial development, the state has interfered extensively and directly in allocating resources," the report said.

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