The Government Work Report Premier Li Keqiang delivered to the National People's Congress, China's top legislature, on Friday not only stresses the importance of providing more financial support for the micro, small and medium-sized businesses, but also highlights the necessity of tightening regulation and preventing funds from circulating only in the financial sector.

"To support market entities, we must ensure that micro, small, and medium-sized businesses have significantly better access to loans and that overall financing costs drop markedly," Premier Li said, which shows that interactive development of finance and the real economy is key to a virtuous macroeconomic system cycle. Finance needs the real economy for development, while the real economy needs finance to support its sustainable development.

But during the past years, the financial sector has at times failed to serve the economy well, as funds flowed into the stock and housing sectors to fuel speculation. As the worst "black swan" event to hit the world in decades, the novel coronavirus pandemic has greatly impacted China's economy, with its GDP declining 6.8 percent in the first quarter of this year－the first time in almost three decades.

Also, the financial sector should accelerate market-oriented reform of commercial banks, by gradually increasing competition in deposit and loan interest rates, and narrowing the deposit and loan interest margin

To cope with the severe impact of the epidemic on the economy, China recently increased the scale of credit investment. For instance, in April newly added social financing increased to 3.09 trillion yuan (US$433 billion), up 1.42 trillion yuan year-on-year, and newly added yuan loan rose to 1.7 trillion yuan, up 681.8 billion yuan year-on-year.

Yet not all of the newly added credit investment flowed into the real economy as expected. As for the hike in housing prices in Shenzhen early this year, it can be attributed to some credit funds meant to serve small businesses flowing into the realty sector. Given the challenges of the times, investors tend to divert funds meant to serve other sectors of the real economy into the property sector. So how to guide new funds into the non-realty real economy will be a big challenge in the post-epidemic period.

To solve this problem, the central authorities should deepen the financial sector reform, so as to change the pattern of finance distribution and guide more funds toward the real economy, as well as establish a long-term mechanism in the post-epidemic period to ensure the financial sector helps boost the real economy.

Also, the financial sector should accelerate market-oriented reform of commercial banks, by gradually increasing competition in deposit and loan interest rates, and narrowing the deposit and loan interest margin. And while access to the financial market should be widened, yuan deposit and loan business restrictions on foreign banks should be gradually lifted. The authorities should also encourage more investment of foreign capital in private banks, help develop efficient small and medium-sized inclusive financial organizations, expand the credit fund supply channel, and raise the overall supply of credit funds.

To improve the financing mechanism of SMEs and help them get more loans, the authorities should strengthen supervision on financial services, reduce the financing cost for the real economy, and build a healthy relationship between financing and the real economy, while curbing the excessive flow of funds into the real estate sector.

Besides, enterprises should adapt to the changes in the post-outbreak economic recovery period, strike the right balance between market supply and demand, and help improve the real economy's profit-earning capacity.

The profit-seeking nature of capital determines that financial resources be distributed to make maximum profits. To a large extent, large-scale capital has been flowing into the stock markets and financial sector, as the real economy's profit margin is comparatively low. And only when the real economy's profit-earning capacity increases substantially can it become really attractive for investors, leading to a virtuous cycle of collaborative development between the real economy and the financial sector.

In the post-epidemic recovery period, the real economy should stick to an innovation-driven strategy in order to clear the low-end development bottlenecks and expeditiously upgrade the high-end industrial and value chains. And to increase the profit-earning capacity of the real economy, especially micro, small and medium-sized enterprises, the authorities should further deepen supply-side structural reform in the real economy and proactively promote high-quality development.

The authors are researchers at the Chinese Enterprises Confederation. 

The views don't necessarily represent those of China Daily.