Although the reforms, whose goal is a more sustainable development model, are viewed as ultimately positive for the Chinese economy, this year may be too soon to see concrete results, many experts said.
Instead, the market is likely to see modifications, especially in industries plagued by overcapacity, said Pu Yonghao, regional chief investment officer at UBS AG.
"Although we are happy about the message sent out by the Third Plenary Session, one must be aware that, in the short to mid-term, there is still much to be done to address China's structural problems."
"Short-term pressure on GDP growth is undeniable, as the new leadership has put structural reform at the top of its to-do list," Pu said.
He added that while stock market fluctuation is sure to come, many sectors — especially heavily polluting ones — will be reshuffled.
"It has yet to affect the listed companies, but smaller ones, such as tiny steel mills in the northern provinces, are shutting down."
He cautioned that if the market is going to play a "decisive" role in the economy, as cited by the reformative plan, investors should be aware that freer competition also can lead to negative results such as bankruptcy.
"We should be aware of the risks stemming from the reform," he cautioned.
The recent reform blueprint has been called the boldest package of policies seen in decades in China. On the economic front, it vows to reduce the level of government intervention to let the market play a decisive role in the allocation of resources. The plan also sets liberalization of interest rates, SOE reform and urbanization as key themes.
In a December report, Standard Chartered Bank Plc called 2014 a "make or break year" when it will be vital for China's new leadership, which assumed office in March, to effectively implement the economic reforms.
The bank forecast 7.4 percent real GDP growth in 2014 for the nation, with growth in the first half slightly stronger than in the trailing half.
But the report also stressed that "the net impact of reform on short-term growth is tricky to call" as the People's Bank of China, the country's central bank, begins its attempt to deleverage the economy.
"We expect bank loans to grow 11 percent in 2014 to 8.5 trillion yuan ($1.4 trillion), slowing from 14 percent growth in 2013," the Standard Chartered report said.
"Non-bank credit growth is also likely to slow. Total credit growth is highly likely to remain above nominal GDP growth, so 2014 will be a year of more gradual leveraging up. We expect deleveraging to kick in only in 2015-16."
That echoes the forecast of UBS.
"We estimate that the growth rate of aggregate financing to the real economy will slow down gradually in 2014," Pu said, adding that in the aftermath of the 4 trillion yuan stimulus package in 2008, credit has grown twice as fast as GDP in China.
"That leads to low efficiency of credit and a bubble in various industries. So, there is room for the central bank to tighten credit."
In the face of an asset bubble and shadow banking, the central bank curtailed funding for the interbank lending market, boosting the overnight Shanghai offered rate was as high as 13 percent. Otherwise, the rate is usually in the rage of 2 to 3 percent.
Earlier in December, the benchmark interbank rate soared again to above 8 percent, adding tension to the financial market. In response, the central bank injected more than 300 billion yuan through short-term liquidity operations on Dec 20, followed by another 29 billion yuan through a reverse-repurchase agreement on Dec 24.
As interbank rates declined, the PBOC canceled the regular seven-day reverse-repurchase operation on Dec 31.
But the central government faces a dilemma in taming runaway credit growth, as it could harm the economy if it clamps down too fast or too hard.
"By and large, credit will be tight next year," said Shen Minggao, head of China research for Citibank, which forecasts a 7.3 percent GDP growth for the country in 2014.
"The cost of capital is already rising in China, and the trend is likely to continue," Shen said.
Source: ChinaDaily,by Emma Dai. Hong Kong
