Economy Report

By Tracy Hall

2014 has finally come to a close but the outlook for the Chinese economy over the upcoming 12 months doesn't look much better. All in all it was a turbulent year that the planners and policymakers might wish to forget. There were signs that things were picking up earlier in the year and much welcomed stabilising of asset prices. In particular, the growth rate of real estate investment slowed down substantially to around 11% between January and November. This should be taken as a positive sign that the authorities' mission to slow down speculator activity has started to take effect. We also saw a wave of financial reforms - such as the Shanghai-Hong Kong Stock Connect - and a wave of other measures that are aimed towards liberalising the financial sector and encouraging new growth.

However, things started to go somewhat downhill in the latter part as the dire debt situation became increasingly apparent. Figures from the National Bureau of Statistics showed that the last couple of months were quite a rocky period for output. In November, factory output apparently rose by 7.2% from the previous year, down from the 7.7% increase seen in October. Depending on which way one looks at monetary phenomena, the inflationary situation that prevailed towards the end of 2015 could also be a worrying sign. The Consumer Price Index (CPI) at the end of last year indicated a staggeringly low price growth rate of just 1.4%. This seems like a fairly disconcerting issue for a country that has battled with high levels of inflation several times over the last decade. Then again it isn't a bad thing for consumers and it is at least in part a result of a broad global decline in commodity prices - especially crude oil. As the BBC's Chief Business Correspondent Linda Yeuh has pointed out, "As one of the biggest energy importers in the world, China's prices are affected by oil, gas and of course hard commodities like iron ore. So, taken together, it looks like the downward pressure on prices in China isn't another cyclical blip similar to when China experienced a couple of years of outright deflation after the Asian financial crisis". Nevertheless, low inflation generally indicates sluggishness in the economy and it tends to increase the chances of active monetary policy stances being taken by central banks. Therefore it is an important indicator that is well worth keeping an eye on in the coming months.

Although we will have to wait a while longer before the government announces its targets and objectives for 2015, the consensus view amongst analysts seems to be that they will play it safe and not do anything too dramatic or ambitious in the coming year. According to a report by Xinhua, the government's key phrase for right now is 'the new normal', which is "characterized by a shift from high speed growth to medium-to-high speed growth; a shift from focusing on quantity and speed to quality and efficiency in growth models; a shift from stressing production expansion to improving current production; and a shift from growth being driven by conventional engines to increasingly driven by new ones". There are rumours floating around in the media sphere that certain economists working for the Chinese government and the People's Bank of China are advising a 2015 GDP growth target of 7%. While some people may be disappointed with slower GDP growth and a move away from the traditional model, it should have a profoundly positive effect on society as a whole because it means more sustainability, more stability and, potentially, cleaner cities.

In terms of the central bank's policy outlook, analysts are broadly expecting to see some stimulus-orientated monetary moves. "We're ready for an RRR (Reserve Requirement Ratio) cut at any point. We think there will be 100 basis points of cuts over the next couple of quarters," said Tim Condon, head of research Asia at ING in Singapore, though he isn't predicting any more interest rate cuts in the near future. The prospect of a more direct fiscal stimulus being enacted in order to offset a broad slowdown of the economy is also still being talked about. Although it is hard to see policymakers being able to justify such a move right now given the credit bubbles that were inflated by the colossal post 2008 stimulus, but that doesn't mean there won't be a sudden change of heart any time soon. Obviously it would remain a strong possibility in the event of a further deterioration of external demand - perhaps from the troubled Eurozone - which would in turn lead to lower GDP numbers for China.

Another one of the key themes going forward will be how the changing growth and regulatory situations affect foreign businesses. In recent months the Chinese authorities appear to have been on an aggressive campaign to unlock new investment avenues from both domestic and foreign parties. The Shanghai-Hong Kong Stock Connect, which came into effect in November, was a ground-breaking move in this respect as it was a major step towards the liberalisation of the Chinese economy and the internationalisation of the yuan. During the Centre Economic Work Conference, which took place between 10-12 December, the country's leaders indicated that further reforms are in the pipeline. Later this year we are likely to see more opportunities for foreign enterprises to access the Chinese service sector and the announcement of more free trade zones.

And of course, another key area in need of reform is the mammoth state-owned sector. Shannon Tiezi of The Diplomat pointed out that "Potential reforms include encouraging more private investment into SOE-dominated sectors (such as telecommunications, energy, and infrastructure) as well as reforming SOE leadership structure to more closely resemble a professional management model. The goal is both to help "marketise" the Chinese economy and make SOEs more competitive as they branch out to global markets". Some analysts suggest that the Xi administration is the best placed leadership China has had to enact big changes in this area. Just how far they are willing to go however remains to be seen…

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