Industry enjoys profitable month

Zhu Baoliang, an economist at the State Information Center, a think tank under the National Development and Reform Commission, said China needs more engines for growth.

"It's an arduous task to reduce the backward capacity, which accounts for up to 20 percent of China's capacity," Zhu said.

"High costs of funding, logistics and human resources have put great pressure on enterprises in almost all industries," he said.

Industrial companies that have high debt ratios may face default risks if the liquidity squeeze lasts for a longer period, economists said.

With more support from the central bank, the seven-day repo rate moderated from a record high of 11.6 percent on June 20 to above 7 percent this week, indicating that the interbank liquidity condition eased slightly.

"An improvement in market sentiment and a drop in interbank rates do not mean a reversal of macro and monetary policies. Over the coming months, we expect credit growth to slow and financing costs in the economy to rise," said Wang Tao, chief economist in China with UBS AG.

Louis Kuijs, chief China economist with the Royal Bank of Scotland, said China needs to focus on reforms instead of stimulating growth.

"Improving distribution of resources, directing resources to new industries and products, and encouraging innovation will help reforming economic structures," Kuijs said.

In addition, enabling migrant workers to live as urban residents will boost growth in consumption and the service industry, he said.