Pointing the Way Forward

　　China’s top leadership convenes to map out economic and reform plans for 2015

　　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.

　　China’s 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， massive 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 year’s APEC meeting in mid-November， 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 country’s economic structure and moving away from factor- and investment-driven growth to innovation-driven growth.

　　“China’s 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

　　China’s 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.”

　　China’s 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 People’s Congress session in early March next year.

　　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.

　　“It’s 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)， China’s 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 shouldn’t be set too high so that there could be more room for structural rebalancing and reforms.

　　“It can’t 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， China’s 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 country’s 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 won’t be changed， but the monetary policy will be fine-tuned toward being looser. There will be at least one interest 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.

　　China’s 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.

　　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 China’s 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 proactive fiscal policy and prudent monetary policy， the government stance won’t 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 year’s 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 year’s 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 year’s 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.

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

　　Zhu Ning， a professor of finance in Shanghai Jiao Tong University， said the implementation of deposit insurance will greatly expedite market-based 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 country’s banking sector will witness real changes.”

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

　　In a speech at Kazakhstan’s 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 China’s 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 China’s 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.

　　Major Tasks for 2015

　　Maintaining steady economic growth

　　Fostering new growth points

　　Upgrading agricultural production

　　Coordinating regional development

　　Strengthening social security network and improving people’s quality of life

　　Eight Emphases for 2015

　　Fulfilling people’s demand

　　Analyzing the consumption market and consumer psychology

　　Guiding societal expectations

　　Strengthening protection of property and intellectual property

　　Fully tapping into entrepreneurial talent

　　Improving education and increasing human resource competence

　　Improving the ecological environment

　　Advancing technology and innovation

　　What does ’new normal’ mean？

　　Consumption： Mass featureless consumption has come to an end and customized consumption is becoming mainstream.

　　Export and international balance： China still has competitive edge in exports； high-level imports and large-scale exports coexist.

　　Market competition： Quality-based differentiated competition has replaced quantity-based price competition.

　　Environment： Plans for green， low-carbon production and recycling will be adopted in the face of global climate change.

　　Investment： Infrastructure interconnection， new technology， new products and new business models have enabled massive investment opportunities.

　　Production： Smarter， smaller-scale professional production will gain more popularity.

　　Risk control： Economic risks are controllable in China， though it may take time to defuse risks caused by high leverage and asset bubbles.

　　Macro-regulation： The effects of massive stimulus measures are decreasing. China should digest the excess capacity while using market mechanism to explore industrial development in the future.

　　Production factors： Cheap labor force used to be China’s biggest comparative advantage， but China’s economic growth is currently more dependent on the quality of human resources and technological progress.

　　The Central Economic Work Conference

　　An annual meeting of China’s top leadership where they map out the country’s macroeconomic policies for the next year. It has been held at the end of each year since 1994 and lasts for two to four days. Participants of the conference include members of the Central Committee of the Communist Party of China and the State Council， provincial leaders， heads of financial regulators and executives from centrally administered state-owned enterprises.

　　Central Economic Work Conference Themes

　　Adapting to the “new normal” and keeping economic growth within a proper range

　　Seeking steady economic progress by making more reforms in all areas

　　Enhancing the quality of economic growth

　　Making progress while maintaining stability

　　Ensuring stable and relatively fast economic development while maintaining social stability

　　Promoting the transformation of economic development pattern while maintaining stable and comparatively fast economic growth

　　Maintaining stable and relatively fast economic growth

　　Shifting monetary policy from “prudent” to “tight”

　　Realizing sound and fast economic growth

　　Maintaining the continuity and stability of macroeconomic policy and improving the quality of economic growth

　　Improving macro-regulation， promoting reform and opening-up and pushing forward economic structural adjustment

　　Fiscal and Monetary Policies

　　A prudent fiscal policy means balanced fiscal revenue and fiscal spending.

　　A proactive fiscal policy means increasing fiscal spending to stimulate domestic consumption， to spur private investment and to expand exports.

　　A prudent monetary policy means adjusting the policy according to economic fluctuations. When there is any sign of economic recession， the monetary policy will be fine-tuned toward loose； when there is any sign of overheated economic development， the policy will be fine-tuned toward tight.

　　A moderately loose monetary policy means increasing money supply by printing money， buying bonds in open markets， cutting reserve requirement ratio for commercial banks and lowering loan rates.

　　A tight monetary policy means expanding the money supply more slowly than usual or even shrinking it.

　　By Zhou Xiaoyan

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