China's growing financial influence in the world economy could potentially distort the current market-led global financial system, the World Bank said on Wednesday and warned that unless Beijing undertakes urgent reforms to eliminate distortions in the broader economy, it could stoke potential instability.
It said China must reduce the "unique and distorted role of the state" in banking and the wider financial sector, which is crucial to global financial stability.
"Unlike other countries, in China the state still maintains pervasive ownership and control of banks and other financial institutions," World Bank said in a 39-page report.
It noted that powerful internal Communist Party committees and authorities appoint and dismiss top executives.
"The state has formal ownership of 65 per cent of commercial bank assets and de facto control of 95 per cent of these assets, making it an outlier by international standards."
In some cases, it added, authorities were simultaneously owners, regulators and customers of banks.
China's financial system was still "unbalanced, repressed, costly to maintain, and potentially unstable", the bank said.
Failure to address the issue could end "three decades of stellar performance" for the world's second-largest economy, the World Bank has warned. It also cited the slowdown in Asia's powerhouse economy saying it showed the growth model was changing for the better - reducing vulnerabilities built up by a credit-fueled bounce that followed the 2008 global financial crisis.
The ruling Communist Party has pledged a wide range of economic reforms, but not in the way the World Bank or western powers want it. Chinese policies are aimed at undermining a free market.
"The state has interfered extensively and directly in allocating resources through administrative and price controls, guarantees, credit guidelines, pervasive ownership of financial institutions, and regulatory policies," the
"Urgency for fundamental reform has further intensified as excess capacity and indebtedness in many economic segments accumulate, amid growing evidence of financial distress," it said.
"Failure to address these outcomes could deflect the economic trajectory after three decades of stellar performance."
The World Bank left its economic growth estimate for China this year at 7.1 per cent.