Five things to watch in Year of the Horse

Economic reform will be main feature of 2014, but it might not be all smooth sailing

Last year was of great significance for China, especially on the economic front. It was the start of a round of economic reforms that are expected to define the development path of the world's second-largest economy. Before a reform blueprint was announced in November, authorities had already signaled their intentions by taking a number of measures such as scrapping the lending rate ceiling and setting up the Shanghai Free Trade Zone.

Since 2013 was basically the time to work out the roadmap and initiate ideas, this year will be the first year of implementation.

As we entering the Year of the Horse, we list five things to watch, which may offer an idea of how the Chinese economy and much-anticipated reforms will go ahead.

Growth target

The central government set the GDP growth target at 7.5 percent for 2012 and 2013, down from the previous 8 percent. The move signaled that policymakers were convinced that the period of high-speed growth had come to an end and that the focus should be on economic restructuring.

The target is important because it conveys an idea of how top policymakers will approach reforms. This can be seen from last year's experience. The leadership took an active approach to reform in the first half of the year, when they seldom talked about growth. But in the latter half of the year, after GDP growth slowed to 7.5 percent in the second quarter, the top leaders talked more about maintaining a certain growth rate, and they adopted a cautious approach in monetary policies and pace of reform.

The 2014 target will be announced and approved by the top legislature at an annual meeting, called the Two Sessions and usually scheduled for March.

Recently, Premier Li Keqiang emphasized his "reasonable zone" theory as he solicited views from economists and entrepreneurs on his Government Work Report to be delivered at the two sessions. That means it is highly likely that the 2014 target will be set at 7.5 percent, showing that the central authorities would not allow radical reform measures to hurt economic growth. But if the target is set at 7 percent, it will show that a number of measures - such as scrapping the deposit rate floor and opening up the capital account - will be advanced at least one year earlier.

Unemployment rate

The jobless rate is seen by the government as a crucial barometer in designing economic policies. For a long time China only revealed the registered unemployment rate. But in August, the National Development and Reform Commission, for the first time, quietly mentioned in a review report of the first-half economic performance that China's surveyed unemployment rate, which better reflects the job market, stood at 5 percent. However, this index was not revealed to the public during the rest of the year.

According to media reports, the government has compiled the surveyed rate since 1996, but the figure was largely used within the government as a reference for policymaking. The reluctance of making it public partly results in the government's concern that the surveyed rate, which is often higher than the registered unemployment rate that constantly stands at about 4 percent, could trigger public jitters.

Policymakers' worries about job market stability led to a situation where the growth button was pressed with stimulus measures whenever economic growth slowed down, a move that often deters the process of market selection and deepening reforms.

In this sense, if the government regularly releases the surveyed unemployment rate this year, it will show its confidence in maintaining job creation and the pace of reform could be quickened. If not, employment concerns will continue prompting the government to rely on investment for short-term growth.

Shanghai FTZ

The development last year of the Shanghai Free Trade Zone - a test ground for China's next stage of reforms - was not impressive. This was mostly because the zone was established in a hurry, a broad consensus among government departments was not reached before its establishment and the pilot program needs more time to deliver tangible results.

But one thing is certain, the negative list, which details industries foreign investors are banned from disappointed many, as it remained a reworded version of the current foreign investment guidelines in use nationwide.

If the 2014 version of the list is little changed, it will show resistance to reforming the foreign investment system remains huge.

What's more, much-awaited financial deregulation has not happened in the zone.

But if more FTZs are set up in other cities before breakthroughs materialize in Shanghai, it could be concluded that the idea of using FTZs to advance China's reform may be a story whose headline is stronger than the story.

Free trade

Bilateral investment treaty talks with the United States and the European Union were in the spotlight last year. Although the talks will take years, a breakthrough has been reached with China saying it will adopt a negative list in negotiating with the US on the deal. This year will see the negotiations on the two deals enter a concrete phase.

In 2013, China signed free trade agreements with Iceland and Switzerland. This year will see a deal with the Gulf Cooperation Council. Talks with South Korea on an FTA are progressing well.

In addition, China has announced it was open to the US-led Trans-Pacific Partnership.

All these efforts show top policymakers are keen to leverage free trade and investment deals to propel reforms at home.

It would not be a surprise to see more deals reached or advanced in 2014.

Internet finance

Other than FTAs, top policymakers are banking on another thing to overcome resistance to reforms at home: the rise of Internet industries.

Premier Li's frequent meetings with executives of big Internet companies, including Alibaba, Baidu, Tencent and Xiaomi, were a strong stamp of approval for their efforts to innovate in industries where state monopoly is the norm.

For example, in the past, things like Internet finance would have been killed in their infantry due to strong resistance from the state banking giants. But the top leadership's endorsement of Internet finance, a marriage of Internet and fund companies, has dealt a heavy blow to traditional banks. Competition in the banking sector is heating up, resulting in a credit crunch for banks and forcing them to increase deposit rates to attract capital.

Clearly, banks have to innovate and improve their services to survive the challenge from Internet giants. This will also pave the way for breaking state monopolies.

Following that logic, it is reasonable to expect policymakers to leverage the power of the Internet and private companies to phase out state companies' influence in competitive sectors.

This year, we expect Internet giants to gain banking licenses and flex their muscles in other industries such as telecommunications.

The authors are financial analysts in Shanghai. The views do not necessarily reflect those of China Daily.

(China Daily European Weekly 01/31/2014 page11)