Pointing the Way Forward

By+Zhou+Xiaoyan

The Central Economic Work Conference， a much-watched annual economic meeting in China， was held in Beijing from December 9 to 11 to focus on lowering the risks of a downturn and speeding up reforms in key areas with a focus on adjusting to the “new normal” in 2015.

Chinas central authorities decided at the meeting that the country will stick to its prudent monetary policy and proactive fiscal policy. Fiscal policy will be more forceful in 2015 and monetary policy will strike a balance between tight and loose. Emphasis was put on economic progress while maintaining stability and great significance was attached to structural rebalancing， improving the quality and efficiency of growth.

China has now entered the period of a new normal， demonstrating resilience， mas- sive economic potential and plenty of room for the government to maneuver. According to opinions voiced at the conference， the nation should adapt macroeconomic policies to the new normal and keep growth rate within an acceptable range next year.

During this years APEC meeting in midNovember， Chinese President Xi Jinping defined the economic new normal as follows： shifting from breakneck economic expansion to moderate to high-speed growth， continuous improvement in the countrys economic structure and moving away from factor- and investment-driven growth to innovationdriven growth.

“Chinas top leadership frequently mentions the ‘new normal because they think structural rebalancing is more important than GDP growth，” said Li yining， a renowned economist and professor at Peking University. “Now is the time for structural adjustment. Missing out on such an opportunity would be a huge loss for China.”

Slower， yet steady

Chinas reform-minded leaders are now showing a greater level of tolerance for slower growth， and they have reiterated on many occasions that the country is capable of maintaining growth “within a proper range.”

Chinas GDP growth slowed to 7.3 percent in the third quarter， the weakest since the global financial crisis， weighed down by a flagging housing market and tighter credit conditions.

Against this backdrop， economists and major financial institutions said the government may lower its GDP target from 7.5 percent to 7 percent. A decision to cut the whole-year growth target for 2015 may have been made during the Central Economic Work Conference， although detailed targets are unlikely to be confirmed and announced until the National Peoples Congress session in early March next year.endprint

JP Morgan has forecast in a report that China will lower its growth target for 2015 to 7.2 percent while UBS， Bank of China， the Chinese Academy of Social Sciences （CASS） and the State Information Center all have predicted that the target will be lowered to 7 percent.

“Its very much likely that the GDP growth target for 2015 will be lowered to 7 percent，” said Zhang Guobao， former vice Minister of the National Development and Reform Commission （NDRC）， Chinas top economic planner.

Zhang Zhuoyuan， a senior researcher with the CASS， said 7 percent is a more practical target for 2015 and this target will remain the standard for quite some time.

Song Qinghui， a financial commentator， said the growth target shouldnt be set too high so that there could be more room for structural rebalancing and reforms.

“It cant go too low either； otherwise it would cause a spike in bad loans， job losses and business failures. The most important thing to watch out for is employment conditions. Central authorities should keep a close eye on the job market，” he suggested.

To prevent further slowdown， Chinas central bank cut the benchmark one-year lending rate by 0.4 percentage points to 5.6 percent and the one-year deposit rate by 0.25 percentage points to 2.75 percent on November 22.

The long-anticipated rate cut came at a time when the countrys economic growth slipped to the lowest in months. “The purpose of the cuts is to bring actual interest rates back to a proper level and lower the financing costs facing many enterprises，”the central bank said in a statement.

However， arguments are prevalent in the market that one rate cut alone is far from enough. Other means， such as reducing the reserve requirement ratio （RRR）， should be given full play to add liquidity to the market.

A combination of proactive fiscal policy and prudent monetary policy has been in place in China since 2010.

“In 2015， the tone wont be changed， but the monetary policy will be fine-tuned toward being looser. There will be at least one inter- est rate cut and one reduction of RRR，” said Li Huiyong， chief analyst with Shenyin and Wanguo Securities Co. Ltd.

A record-low inflation level also raises the probability of more easing measures by the central bank as it offers more room for monetary loosening.

Chinas consumer price index （CPI）， the main gauge of inflation， rose by 1.4 percent year on year in November， the slowest increase since November 2009， said the National Bureau of Statistics （NBS） on December 10. The producer price index （PPI）， which measures inflation at wholesale level， dropped 2.7 percent year on year in November， its largest fall in 18 months.endprint

Wang Jun， a senior economist with the China Center for International Economic Exchanges， said China is now facing mounting deflationary pressure.

“This tendency will continue into 2015 and it requires immediate responses from the Central Government in monetary policy. Combating deflation means Chinas prudent monetary policy should be fine-tuned to‘prudent and yet lean toward ‘loose，” Wang suggested.

“Cutting rates and lowering RRR should be alternately used next year to lift market sentiment，” Wang suggested.

A recent report from Goldman Sachs also said although the basic tone for 2015 is still pro-active fiscal policy and prudent monetary policy， the government stance wont be confined by those expressions， as evidenced by the recent interest rate cut in November.

Quicker pace of reform

One of the most fruitful developments of last years Central Economic Work Conference was the decision to establish a central leading team for “comprehensively deepening reform” to spearhead reforms across all areas of society.

The team convened seven times in 2014， resulting in concrete progress in the areas of fiscal policy， the hukou （household registration） system， rural land transfers， the Shanghai free trade zone， anti-corruption efforts and judicial reform.

According to a statement released after this years conference， China will accelerate reform in nine areas next year including the capital market and market access for private banks.

Reform will ideally speed up through administrative approval， investment， pricing， monopolies， franchising， government-purchased services and outbound investment. This takes into consideration both next years needs and long-term interests.

More efforts will be made to transform the reform into growth. The evaluation system for reform and general public access to the reform work will also be improved.

“The fact that China has entered an economic new normal indicates the country should boldly roll out reforms in key areas so as to release the dividend of reforms and to unleash market vitality to shore up growth，”said Liu yuanchun， vice Dean of the School of Economics at the Beijing-based Renmin University of China.

On November 30， China started soliciting public opinion on a draft regulation regarding the establishment of a deposit insurance program， which will be in full operation in six months or a year. The deposit insurance program is one important component of a safety net that protects financial stability. China has extensively discussed the setting up of such a program for years.endprint

Guo Tianyong， a professor of banking at the Central University of Finance and Economics， said such a scheme is badly needed in Chinas market-oriented financial reform.

Zhu Ning， a professor of finance in Shanghai Jiao Tong University， said the implementation of deposit insurance will greatly expedite marketbased interest rate reform in China.

“The lack of deposit insurance system has severely held back other financial reforms. After interest rates are full liberalized in China， the countrys banking sector will witness real changes.”

Another task high on Chinas economic agenda is to strengthen regional integration and promote trade by resurrecting an ancient trade route.

In a speech at Kazakhstans Nazarbayev University in September 2013， President Xi proposed establishing a Silk Road Economic Belt， similar to the Silk Road of more than 2，000 years ago， to boost political and economic ties between China and Eurasian countries.

China has also been trying to revitalize an ancient seaway to promote economic ties with the ASEAN nations since October 2013 when Xi proposed the 21st Century Maritime Silk Road during a visit to Indonesia.

The initiatives aim at enhancing connectivity and trade ties with Central Asia and South Asia by building roads， railways， ports and airports across the two land masses. On November 8， China announced it would contribute $40 billion to set up a Silk Road infrastructure fund to boost connectivity across Asia.

“The two initiatives will be the most important mid- and long-term national strategies for China， in terms of Chinas major-country diplomacy， regional integration and industrial upgrade，” said Guan Qingyou， Assistant Dean of Minsheng Securities Research Institute.

Zhang yansheng， Secretary General of the Academic Committee of the NDRC， said Chinas labor- and resource-intensive industries can profoundly benefit from the construction of the Silk Road Economic Belt and the 21st Century Maritime Silk Road.

“It will help increase exports of products， equipment and laborers from China to countries along the proposed trade routes，”Zhang said.endprint