HANGZHOU, China (Reuters) - China needs to develop a better system for financing small businesses that drive innovation in the economy but currently struggle to access the funds they need for growth, a leading Chinese think-tank said in a report published Sunday.

FILE PHOTO: A clerk counts Chinese 100 yuan banknotes at a branch of a foreign bank in Beijing, China January 4, 2016. REUTERS/Kim Kyung-Hoon/File Photo

China’s economic development over the past 40 years has taken place through a financial system that has high government intervention and is “absolutely dominated by banks”, the China Finance 40 Forum said in an annual report.

Such a model, however, tends to distort financial resources in favor of large companies, the report said. That comes at the expense of smaller firms, which are the main drivers of innovation in the economy but usually lack the necessary assets for collateral or government guarantees to secure finance for growth.

Financial regulators have also failed to prevent certain financial risks, the report said.

The current financial system “is clearly not well suited to the core task of current high-quality economic development. Therefore, an important task of financial reform should be to adjust the financial structure,” the report said.

China Finance 40 Forum is a think tank that focuses on economics and finance policy research and comprises members from regulators, universities and financial institutions.

China’s reliance on technological innovation for future economic growth has made changing the structure of the financial system an urgent matter, said Huang Yiping, the report’s leading author and a professor of economics at the National School of Development of Peking University.

Policymakers need to develop a multi-layered financing structure and reduce control over capital markets to open funding channels for innovative firms, Huang said.

Only about 10% of total financing for Chinese companies comes directly from the financial markets, well below 43% for the United States and 23% for Britain, Huang said.

Banks should be encouraged to link small and medium enterprises (SMEs) with the country’s capital markets, said Yang Kaisheng, a consultant for the think tank and former president of China’s largest lender Industrial and Commercial Bank of China. Yang said there was also a need to set up a policy bank focused on SMEs involved in technology and innovation.

Policymakers should also temper their current crackdown on shadow banking, it added.

Though loosely regulated, the shadow banking sector serves as a supplement for traditional lending methods, said Xiao Gang, a senior researcher at the think tank and former chairman of China’s securities regulator.