If the return on assets of China's SOEs goes up by only one percentage point, it will add about 1.5 percentage points to China's GDP growth, Lardy said, adding that China needs to inject more competition in those sectors where State-owned firms remain dominated and improve their efficiency.

Despite the recent stock market turbulence in China, Lardy believed China's financial reforms would stay on track. "The central bank led by Zhou Xiaochuan seems to have a very clear vision of the time, path and sequence for reforms in the financial sector. They have been following this roadmap for several years. I think they will continue to do that," he said.

Lardy hailed the PBOC's decision on Tuesday to remove the interest rate ceiling on term deposits longer than one year, saying it's another step in the gradual process of interest rate liberalization and also an important step forward in financial reforms.