A little on China's economic reform announcements

This month China’s leading party announced a package of economic reforms.  This involved promise of changes to the one-child policy and residency laws; more important to buy-side firms were the financial measures. State-owned banks now face competition from the private sector; there will be deregulation with regards to interest rates; and capital controls will be relaxed. Whilst a dream for proponents of the free-market, it may not be a good one. Aside from other external factors, there are a lot of issues that will arise from these economic reforms which the street truly has not taken into much consideration. SOEs have stayed afloat under cheap credit, although often not repaid loans; and banks, to compensate, have profited from inflated net interest margins. China gorges on cheap credit. Liberalising this would raise borrowing costs, and would certainly bring a tide on many struggling firms with insolvency becoming a lot more evident. In addition, Chinese Banks cannot continue current lending practices. So whilst the sell-side may upgrade many, caution should definitely be taken if ‘buys’ are fuelled by macro thoughts. Additionally, the street truly has not accounted for China’s capital account liberalisation potentially seeing capital outflows rather than inflows.