The central government faces three major risks in reforming the financial sector, top economist Wu Jinglian said yesterday. Speaking in a public forum in Beijing, Mr Wu, of the Development Research Centre under the State Council, said the government must be careful in dealing with the non-performing loans of state-owned banks and problems created in the past few years by the overheating stock market. He also warned of possible social unrest and economic instability triggered by a widening of the wealth gap. 'Many of these risks have accumulated in the past few years,' he was quoted as saying by Xinhua. 'And the most important one comes from the banking sector.' He said bank loans accounted for 90 per cent of corporate financing in China and 75 per cent of them were provided by China's four state-owned commercial banks. 'These four banks have accumulated large amounts of overdue loans in the past 20 years because they have not reformed their banking system and continue to shoulder much of the burden of servicing [China's] state-owned enterprises,' Xinhua quoted him as saying. However, Mr Wu was optimistic that these problems could be resolved through 'financial means', saying China's financial sector had the necessary resources. Mr Wu was more critical of how the government would handle state-owned assets. The government plans to set up professional asset management companies at different levels of government to oversee the country's state-owned assets - estimated at about 1 trillion yuan (HK$943 billion) - to promote efficiency and combat corruption. But Mr Wu cautioned that the government must first contemplate how to replenish the pensions of retired urban state company workers before such reforms were implemented. 'If the state assets are just assigned to these companies, the government will lose the last [financial] resource that it can use to replenish the debts [it owes to] the retired state workers,' he said. Since local governments would most likely seek to offload state-owned assets through management buy-out methods, Mr Wu warned that ensuring the sales were conducted fairly would be critical. Despite their state-ownership, a large number of firms have either diverted funds for the pension schemes to other investments or simply never contributed to the funds. The vacuum has been described as the biggest obstacle to China's plan for a social security system.