Moody's Investors Service says that statements by China's political leaders and regulatory authorities during the recent National People's Congress indicate that government will press ahead with banking and financial reform.
"On balance, we consider that the key reforms planned for China's financial markets -- the opening up of the banking sector, de-regulation of interest rates, introduction of a deposit insurance scheme, and implementation of new fiscal initiatives -- are credit positive for the sector, if executed well, during the next 5-10 years," says Minyan Liu, a Moody's Associate Managing Director.
"However, the reform agenda will bring its own challenges to the banking sector over the immediate next 2-3 years," says Liu, who was speaking on the release of a new Moody's report, titled "China's Reiteration of Its Commitment to Reform Is Credit Positive for Chinese Banking System."
"In particular, deposit-rate deregulation will add to the banks' funding costs, and would consequently pressure net interest margins," says Liu.
"And the introduction of a deposit insurance scheme would decrease the likelihood that systemic support, an important consideration in assessing the creditworthiness of Chinese banks, would be provided to all financial institutions," says Liu.
The Moody's report says that these assumptions mean that the impact of reform will likely mean a widening of the gap in creditworthiness between China's largest banks, which are better positioned to adapt to the new environment, and its smaller institutions.
In terms of the specific benefits of reform, the report says that market-based pricing for interest rates will provide, for example, transparency in the pricing of financial products and will help reduce pricing distortions.
In addition, concrete plans for developing multi-level capital markets will address the risks associated with any over-reliance on the banking sector to provide the bulk of funding, whether directly or indirectly.
Moody's further notes that the opening up of China's banking sector to new investors, including private investors, has started, but the authorities are managing it in a way that is unlikely to disrupt the system.