If derivatives are the problem, he adds, it is strange that Germany, a big user of the contracts, has not been affected as severely in the financial crisis, whereas Spain and Greece, who do not go in for derivatives, were badly hit.

"For the size of China's economy, it should have a very vibrant derivative market," Kothari says.

He suggests the government introduce a whole batch of derivatives at one time.

"Many derivatives link, so you cannot have one but not another. It's like if you have a buffet, you cannot offer only one or two dishes. If you have debt-related derivatives, you have to have currency-related derivatives."

The stock market also needs to be reformed, Kothari says.

He doesn't agree with analysts who say the Chinese stock market is poor because Chinese investors don't have the insight for long-term investment but prefer short-term speculation.

"In the US from 1968 to 1982, the stock market was basically flat. In Japan, the Nikkei Index was almost 40,000 in 1989, and it is 14,000 today. So it is normal that the stock market fluctuates. But China has been growing so rapidly so the stock market shouldn't be so low."