The second session of the 12th National People’s Congress has been the occasion for Chinese authorities to outline future reform plans, notably the liberalisation of the financial sector. The important liberalisation of bank deposit rates is to be completed gradually by 2016, whereas five privately funded pilot banks – managed by large groups active in sectors such as the Internet – are to be set up. Those measures aim to raise attractiveness and lending (first to SMEs) from the formal banking sector. Also, PM Li Keqiang has pointed out that further private defaults on corporate bonds – like the one that occurred for the first time, hitting a solar panel company – will arise in overcapacity sectors and on the property market. By renouncing systematic bailouts in case of non-significant default, Beijing sends a warning to banks and shadow banking users. They want to avoid moral hazard resulting from implicit state guarantee, and foster investments in more productive projects. Besides, the PM re-affirmed the government commitment to an enhanced market role notably by announcing a partial privatisation (by Chinese companies) of dominant state-owned enterprises (SOEs).

Impact on country risk

Beijing shows determination to push forward financial liberalisation. In a context of slowing growth – still forecast over 7% – this process is welcome given the huge problem of potential destabilisation of shadow banking. Allowing limited defaults on shadow banking products and corporate bonds relates to the government’s pledge to streamline overcapacity industries and clean up the financial system. However, Beijing should keep bailing out SOEs and particularly state banks until a deposit insurance system is introduced to prevent financial instability from harming the economy. Therefore, despite rising strains on the financial market, a systemic crisis seems unlikely as Beijing is committed to use its political and financial means to implement reforms, but this risks being slow and tricky as the economy is on a structurally mined path. Main obstacles to reforms will lie in the weaker economic growth – exacerbated by a correction on the property market and corporate defaults – and vested interests within the Communist Party. The reform programme faces high resistance from officials and SOEs, defending their privileges and strong position.
Hence, there is some hope that Xi Jinping’s more powerful and centralised presidential function could raise chances of achieving policy objectives in the long term.

Analyst: Raphaël Cecchi, r.cecchi@credendogroup.com