China's economy is facing potential risks ranging from a growing wealth gap to an aging population.

A national report prepared under the guidance of Premier Wen Jiabao acknowledged that key challenges also include dependence on oil imports and financial instability.

"These aspects interact with each other and pose a great threat to the growth of China's productivity if any of them goes wrong," according to Dai Guoqiang, Dean of the Financial School at the Shanghai University of Finance and Economics.

This national report on the status quo of China's productivity is the latest in a series of government documents recognizing potential risks to China's economic growth.

Last month, China mapped out its new Five-Year Guidelines (2006-2010), which stated that the country must abandon its current "growth-at-any-cost" model.

And earlier this month, China's first report on financial stability came out.

The report said the overall financial status was sound at the moment but added that China should tighten its risk-management system to oversee financial activities.

The country must be made aware of the risks that will occur during the shift in emphasis in China's economic growth model, the report said.

Currently, the growth is heavily dependent on investment and exports which could lead to imbalanced development in various industries.

Some overheated parts of the economy, such as real estate and steel in certain regions, are likely to fluctuate during the shift.

As most of such businesses are supported by loans, banks should be careful of the increase of bad-performance assets.

Because the domestic stock market has been stuck in the doldrums for quite some time, many businesses still rely on banks as a major capital source and this necessarily aggravates the risks to banks.

Given such uncertainties in the financial market, it would be sensible to rev up an oversight mechanism to drive certain poorly performing financial institutions out of the markets. "To build up a sound credit system should be the top priority," said Dai.

"Most risks are rooted in the credibility gap. You can't expect people to rely on reputation only — the nation has to enforce more effective rules and punishments to force enterprises and individuals to act responsibly."

Dai added that the government was and should be the central pillar in carrying out all the reforms but that it should not interfere with the banks' commercial business.

The role of the government should be as a rule-setter, not a business decision-maker.

"Financial activities have far-reaching consequences on the social welfare system," said Dai.

(Shanghai Daily November 28, 2005)