Tackling the shadow banking is huge task

But this is exactly what China has to do - if it wants to continue to grow relatively fast and avoid a full-blown financial crisis. According to the resolution adopted by the national leadership's third plenum last year, one of the goals of the next round of reform is precisely to build a large, versatile financial system able to guard its hardcore from indiscreet or unethical practices.

This is where a multi-layer financial system fits into the picture, as many Chinese economists have pointed out.

This system would consist of a layer in which a few institutions hold the country's most important financial resources on behalf of the government, a second layer in which many institutions, not necessarily all State-owned, compete in the marketplace - allowed to conduct their own innovations but not expecting a government bailout if things go badly - and a third layer that is left for small services left alone to sink or swim and that therefore cannot do major harm to the main body of the national financial system.

There will be some shadow banking, but it should not be allowed to grow so large and to fund so many local government projects.

With better rules and more institutions, China should be able to redirect local governments' fundraising channels from shadow banking to a more open and better-regulated bond market.

Beijing recently said it would allow local governments to issue bonds to pay back their debt. The question now is who will hold their bonds and who will help float them. This year it would not be too difficult for China to make a few more good moves in this direction.

But erecting the framework for a multi-layer financial system will require a much larger effort, entailing a tug-of-war between interest groups.

In the process, the performance of many listed companies, and indeed all companies in the financial service industry, along with a huge amount of wealth in China, will be affected.

If the financial service industry continues to be dominated by a few very large State-owned banking corporations, the change desired would not materialize and the real economy would probably continue to depend on shadow banking for a great portion of its credit. That would pose a permanent risk for the country's growth.