Will China’s slowdown derail reforms?

A child holds a Chinese national flag at Tiananmen Square in Beijing, China.
Tomohiro Ohsumi | Bloomberg | Getty Images
A child holds a Chinese national flag at Tiananmen Square in Beijing, China.

China's economic slowdown has pushed policy makers toward stimulus measures, spurring analyst concerns about whether long-sought reforms may fall by the wayside.

"While structural reforms remain at the top of the policy agenda, the recent cyclical slowdown has made advancing them less urgent than was the case six months ago," Barclays said in a note Tuesday. "There is no clear indication of how fast this area may progress in the short term, except around combating corruption, where the government has highlighted it will do 'whatever it takes.'"

China has been pursuing reforms to shift its economic model away from labor-intensive and export-oriented manufacturing, which has been dependent on continuous credit growth, and toward one more reliant on private consumption, services and the private sector.

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Reforms have targeted a wide range of issues, including corruption, a troubled property sector, non-performing loans at banks, pollution and overcapacity in many industries, as well as efforts to transition its currency, the yuan, toward becoming freely convertible in international markets.

Will reforms falter?

But the resolve to pursue those reforms may falter as economic growth has slowed.

"Overall, the mood is subdued, due to the strong headwinds of a falling property market and elevated local government debt," Barclays said. It doesn't expect Beijing will tolerate a growth rate far from the official target of 7 percent for this year. While that still sounds like a fair clip, it's a far cry from the double-digit growth the country has seen for decades. In 2014, China's [gross domestic product] grew 7.4 percent, its slowest pace in 24 years.

Other signs of slowdown are emerging. Chinese industrial production for the first two months of the year fell back to levels seen during the 2008 financial crisis, while fixed asset investment for January and February was the weakest since 2001 and retail sales hit a decade low.

In response to growth concerns, the government has stepped up stimulus measures, such as cutting banks' reserve requirements and interest rates, some of which run counter to reform goals, such as moves to cut industrial overcapacity and reducing overreliance on credit.

Reform scorecard

One scorecard of progress on reforms cites backtracking over the past eight months. Morgan Stanley's Deleveraging Scorecard on 10 segments slipped to 48 from 51 eight months ago, out of a total 100, the bank said in a note this month.

"China's deleveraging looks set to stay a long and bumpy ride," it said, citing falling scores in areas including guiding down the real exchange rate, fiscal transfers to low-end households and small-and-medium-sized enterprises and generating negative real borrowing rates. But it saw improvement in recognizing banks' non-performing loans, better controls on informal credit and in capital markets development.

Whether China faces risks from debt defaults became the second-largest concern after geopolitical risks in the March fund manager survey from Bank of America-Merrill Lynch, with 19 percent of those surveyed ranking it as their greatest concern.

China's total system leverage in yuan terms reached 247 percent of official gross domestic product (GDP) in 2014, Morgan Stanley estimated.

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Concerns over whether China will maintain its resolve to enforce environmental controls to rein in rampant pollution also took a hit over the past few weeks after Beijing censored the documentary "Under the Dome," which was highly critical of the country's regulators and industry and graphic in its depiction of the effects of pollution.

China's total system leverage in yuan terms reached 247 percent of official gross domestic product (GDP) in 2014, Morgan Stanley estimated.

Worries overplayed?

To be sure, not all reforms are in danger of going by the wayside.

Efforts to reduce red tape remain at the top of the government's agenda, HSBC said in a note this week, adding that the five-year target to reduce a third of all administrative approvals has already been achieved.

China cuts economic growth target
China cuts economic growth target   

"It will also make public lists of power and responsibilities for all provincial levels of governments in 2015 to create a level playing field for businesses," HSBC noted. "Cutting red tape also matters for employment as it gives businesses more room to grow."

Additionally, authorities are continuing to pursue changes to local government financing, including rules to allow them to issue and repay bonds. These steps will help address long-running concerns about whether local-government financing vehicles will be able to repay their borrowing.

"We consider these measures an important step in reforming China's current budget system and investment and financing mechanism," Nomura said in a note Tuesday. "It will help resolve local government financing problems, mitigate systemic financial risks and reduce the financing costs of local governments."

Reports also emerged this month that Beijing could fully liberalize deposit rates as early as this year, two years ahead of schedule. IHS noted that the change would help smaller Chinese banks gain a foothold in the market and underpin hopes for the rollout of further financial reforms.

The country's anti-corruption campaign also appears to be continuing apace. The drive has been sweeping, touching corporate executives, the military and even senior party officials, fulfilling President Xi Jinping's vow to root out graft among "tigers and flies" -- or at every level.

--Nyshka Chandran contributed to this article.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1