Chinese government's "supply-side" reforms may affect the asset quality and profitability of overcapacity industries and the financial sector, which could dampen investor confidence in Chinese assets. A slump in key asset values in China could destabilize the economy and the financial sector unless proper measures are in place to anchor investor confidence.

According to a report that Standard & Poor's Ratings Services, corporate defaults are likely to increase as the central government gradually withdraws its implicit support for troubled companies. And deeper measures to support Corporate China will probably come at the expense of banks' profitability.

A disorderly decline in property prices could weigh on the ongoing corporate deleveraging efforts and in turn undermine corporate refinancing capabilities. The dual effects may eventually weaken the creditworthiness of banks, which in turn could further undermine the property market.

"We expect credit profiles to deteriorate across the financial sector, particularly for smaller players," said Standard & Poor's credit analyst Qiang Liao.