China's government said the nation's financial system must“better” serve economic growth under a prudent monetary-policyframework as the cost of borrowing on the interbank marketsurged.

Authorities will boost credit support for industries thegovernment has defined as strategic and those that arelabor-intensive, the State Council, or Cabinet, said in Beijingtoday after a meeting led by Premier Li Keqiang. The nation mustmore firmly guard against financial risks, according to a statementon the central government's website.

The comments follow a jump in the seven-day repurchase rate, agauge of interbank funding availability, to the highest level sinceJune 2011. Slowing economic growth combined with a crackdown onillegal capital inflows, efforts to rein in shadow banking, and acampaign to control home prices have contributed to increasedborrowing costs. The central bank has refrained from usingreverse-repurchase agreements to inject funds into the interbankmarket since Feb. 7.

“Beijing's new approach is to focus on reform, rather thanstimulus,” said Qu Hongbin, HSBC Holdings Plc's Hong Kong-basedchief China economist, who cut his estimate for expansion this yearto 7.4 percent from 8.2 percent. “In the last three months, we haveseen enough evidence that the current generation of leadership isreally determined to push forward reform.”

The State Council meeting today discussed how the financialindustry can support a restructuring of China's economy, accordingto the statement. Chinese leaders have sought to reduce thenation's reliance on investment and exports for economicgrowth.

China must push forward interest-rate liberalization, encouragecorporate overseas investment, boost bond issuance and supportthose seeking to buy their first homes, according to the statement.Bank lending for projects in industries with overcapacity must bebanned, the State Council said.

The financing system must “support economic transformation andupgrading in a more forceful way, serve real economy development ina better way, promote domestic demand in a more targeted way, andprevent financial risks in a more concrete way,” the governmentsaid in the statement.

China must also uphold prudent monetary policy and “use itwell,” and keep a reasonable scale of monetary aggregates, theState Council said.

Central bank Governor Zhou Xiaochuan said in April that thenation needs to “sacrifice short-term growth” to make reforms inthe economy.

Chinese industrial production rose a less-than-forecast 9.2percent from a year earlier and factory-gate prices fell for a 15thmonth in May, while export gains were at a 10-month low and importsdropped. First-quarter economic growth slowed to 7.7 percent from7.9 percent in the last three months of 2012.

Investment banks from Morgan Stanley to UBS AG this month cuttheir estimates for China's growth in 2013, and Barclays Plc isestimating that expansion will slow to 7.4 percent, below thegovernment's full-year target of 7.5 percent.

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