By Li Hongmei

The preference of Chinese investors to plough their money into financial markets rather than in the physical economy poses a great challenge for the country, which is trying to reinvent its manufacturing sector, reports the Chinese-language Economic Information Daily.

The sizeable profits generated from financial asset speculations in a market with ample liquidity and growing foreign capital attracted by an appreciating Chinese currency have pulled money away from investments in the business, the paper said.

With people pursuing sudden wealth and a mindset of putting money in property rather than in establishing factories, bubbles are forming in China's financial markets.

Wenzhou, Ordos, and Shenmu county - where a majority of local residents had invested capital in private loan businesses and market speculations - are examples of the possible economic doldrums to be faced after the property market bubble bursts, the newspaper said.

Zong Qinghou, founder and chairman of beverage giant Hangzhou Wahaha Group, once said that no matter how a society develops, the manufacturing sector remains the foundation of the economy as it creates wealth, saying "If a society ignores (wealth) creation and only thinks about distribution, where would people's food and clothes come from?"

Observers, meanwhile, claim that China's recent economic slowdown has been caused by declining demand from overseas markets and structural issues facing its industries, which have resulted in an unhealthy polarization pressuring local businesses.

Businesses at the lower end of the industry chain are facing more challenges than those at the upper end as it is easy for suppliers to transfer the rising costs to their clients. On the other hand, the poor sales have made it difficult for vendors to hike prices despite rising costs, the newspaper noted.

Similarly, the size of a company has become an increasingly important factor in deciding its fate, as the bigger a company is the more resources and power it has in the market, the newspaper added.

Although China became the world's largest manufacturer in 2011, accounting for a fifth of global production value in the sector, the technologies used are still lagging when compared with other leading economies. Chinese manufacturers are also still relying on imports of key components for their products and have not established valuable brands in the market, according to the newspaper.