This has nothing to do with XML 1.1 (so closing this report as "won't fix").

The UTF-8 text that you present works very well:

>>> p=xml.parsers.expat.ParserCreate(encoding="utf-8")
>>> p.Parse("<x>\xc3\x87</x", 1)
1

The character LATIN CAPITAL LETTER C WITH CEDILLA is definitely supported in XML 1.0, so there is no need for XML 1.1 here.

If this still fails to parse for you, it may be because the input is actually different, e.g.

>>> p=xml.parsers.expat.ParserCreate(encoding="utf-8")
>>> p.Parse("<x>&#195;\x87</x>", 1)
Traceback (most recent call last):
  File "<stdin>", line 1, in <module>
xml.parsers.expat.ExpatError: not well-formed (invalid token): line 1, column 9

I.e. the input might contain the character &, #, 1, 9, 5, ;, and \x87. That is ill-formed UTF-8, and the parser is right to choke on it. Even if it was declared as XML 1.1, it will still be ill-formed, because it still would be invalid UTF-8.