China's State Council reveals 10 areas the financial sector should focus on

Diversified insurance products is one.

According to Barclays, in the guidelines released for the financial sector on 5 July 2013, China’s State Council emphasized that the financial sector should support economic structural adjustment and industrial upgrades. There are 10 key areas the financial sector should focus on:

1) maintaining “stable” monetary policy and keeping “proper” credit supply to the economy, 2) industry reforms, 3) small and micro enterprises growth, 4) agricultural sector development,

5) consumer finance, 6) Chinese corporates going overseas, 7) development of diversified capital markets, 8) diversified insurance products, 9) encouraging private capital into financial industry, and 10) preventing systemic financial risk.

Here's more from Barclays:

In our view, the key implications for the banking sector from the guidelines are the following: 1) financial sector reform will likely accelerate, in particular interest rate liberalization—raising the deposit ceiling—and capital account opening;

2) increasing the efficiency of total social financing (TSF) stock is a key thus limited growth for money supply; 3) further regulatory tightening and monitoring of local government debt, WMPs, property and sectors with overcapacity (hence, TSF will likely decrease in 2H13 from the high level of RMB 9.1tn in 5M13);

4) NPL ratio likely to rise only modestly but credit charge could go up and NPL coverage could drop as banks will be given more flexibility in NPL write-off and sales amid a slowing macro environment; and

5) chance for abrupt rate moves will be lower going forward as the government commit to smooth monetary policy. We believe the recent high volatility in interbank rates and other rate markets indicate that China’s financial sector is much more market-rate driven than generally thought, and effective guidance and communication on monetary policy by the PBOC is critical for maintaining financial market stability.

We see the recent weakness in H-share China banks' share prices as an opportunity to selectively accumulate. We reiterate our preference for large defensive banks: BOC, ICBC, CCB and BoCom (all rated OW).

Financial sector should support economic transformation; meanwhile, the government is committed to keeping financial stability

While these are two seemingly incongruous objectives, the government will try to strike a balance. On 5 July 2013, the State Council released a set of guidelines, specifying the roles for financial sector in supporting China’s economic adjustment and restructuring.

We believe the guidelines indicate the new government’s commitment to economic restructuring to achieve high-quality sustainable growth without large stimulus ahead. The State Council emphasized the importance of ‘financial stability’ in its statement, and the bottom line of 'no systemic or local financial risks' needs to be strictly defended.

Key points in the guideline include: 1) maintain a ‘reasonable’ money supply to the economy, increase the usage efficiency of the existing TSF stock; 2) strictly defend the bottom line of 'no systemic or local financial risks';

3) support banks to sell or write-off NPLs; 4) strictly control financial risks with focus on LGFVs, property, wealth management products (WMPs) and sectors with overcapacities;

5) encourage financial institutions to support Chinese corporates’ overseas expansion; 6) encourage private fund capital flows into the financial sector to allow the establishment of privately-owned banks; 7) to optimize financial services to small and micro enterprises (MSEs), and lower financing cost for MSEs.

NPL disposal encouraged; focus on risks in LGFV, property, WMP and sectors with overcapacities

The guidelines again highlighted the risks in LGFV, property, WMP and sectors with high energy consumption/high pollution/overcapacity. Banks are encouraged to 'steadily, orderly and gradually' sell and write-off NPLs but need to avoid new risks rising from any disordered NPL disposal process.

We still expect banks’ NPLs to increase mildly in 2H13, amid a slowing macro environment, but we believe there should be no spike in NPLs in the near term.

More than just teaching banks a lesson, the pushing forward of financial reform is a key step in China’s overall long-term structural reform

We believe the PBOC’s recent move refusing to further inject liquidity to quickly quiet down interbank rate tension goes beyond just teaching the aggressive banks a lesson on improving their liquidity management; in fact, it is consistent with the new government’s intention to control monetary expansion and increase money efficiency.

The guideline reiterates that China should push forward interest rate deregulation, RMB internationalization and capital account opening, and individuals' outbound direct investment will be gradually allowed. It is in line with our view that interest rate liberalization may be accelerated in 2H with the potential lifting of deposit rate ceiling; the negative impact would be larger on smaller banks, in our view.