Call for closer scrutiny of shadow banking

"Supervision to regulate the shadow banking sector is essential. It will ensure the growth of the banking industry and improve the development of the shadow banking sector with healthy competition and more diverse sources of capital," said Leung.

Leung added interest rate liberalization was a method to fit the development of the shadow banking sector, which could be further monitored and regulated.

Certain measures were issued recently to regulate the shadow banking system on a continuous basis.

A notice was issued by the China Banking Regulatory Commission earlier this year to regulate the investment services of wealth management products operated by commercial banks.

"The regulation released in March has managed to regulate banks selling wealth management products under controllable risk conditions and under regulated supervision. Meanwhile most trust companies and banks have self-protection systems to avoid risk," said Rui.

In addition, the report also said supervision over private financing activities should be more regulated to lower the risks for private loan-lending companies to issue loans.

Take the example of the small loan companies in Wenzhou. The city is currently undergoing financial reform to regulate private lending activities, while more risk-control policies have been imposed.

"We've been required to have more risk-control measures to prevent the occurrence of large amounts of unpaid debts from a single borrower by imposing greater restrictions on enterprises applying for loans," said Weng Yifeng, chairman of Ruian Huafeng Small Loan Co Ltd in Wenzhou, Zhejiang province.