Complex choices to suit 'new normal'

Editor's note: Last year's economic expansion is widely expected to be the slowest in many years, and the central leadership envisions a "new normal" for the pace GDP growth and its structure going forward. What will unfold in 2015 - sustained, rapid expansion or an orderly transition to slower growth? China Daily asked a group of economists and analysts on their expectations for the economy in 2015.

Q1 What is the most likely outcome for China's economy this year - sustained, rapid expansion or an orderly transition to slower growth?

Q2 What is the most important indicator that observers should use when judging whether a transition has taken place? How can China achieve the goal implied by that indicator?

Q3 What is the biggest concern for the Chinese economy in 2015? How can China address that concern?

Q4 What is the most resilient part of China's economy? How can China best utilize its strengths in this area?

A1 Few analysts expect China's economy to grow at a rapid rate in 2015, which we would define as more than 8 percent. The debate is really about whether China's economy will expand at about 7 percent, a reasonably rapid pace, or enter a period of much lower growth. There are questions about whether China will be able to maintain that pace of growth in the medium term.

A2 We would caution against inferring too much from the GDP numbers. Perhaps the clearest indicator about how content the government is with a slower pace of economic growth will come when it announces this year's economic growth target. If it chooses the same target as last year of "around 7.5 percent", it will be a clear sign that it is uncomfortable with weaker economic growth. The continued setting of high growth targets only reinforces dependence on short-term monetary and fiscal loosening.

A3 Our concern is that the reform agenda gets sidetracked by the economic slowdown. The government needs to move decisively in terms of implementing the reforms it has promised in 2015 - now that the groundwork has been laid - if they are to yield dividends for the economy in the medium term.

A4 Consumer spending has proved resilient, despite headwinds from the ongoing anti-corruption and anti-extravagance campaign, the troubled real estate sector and falling corporate profitability. We hope that this reflects the beginning of a process of redistributing wealth to households from the corporate and government sectors.

A1 Some pessimists expect China's growth to collapse under the weight of accumulated debt and structural imbalances. My view is more optimistic. Clear-sighted implementation of reforms agreed at the Third Plenum of the 18th Central Committee of the Communist Party of China offers the hope of an orderly slowdown. Our forecast is for GDP growth of about 7 percent in 2015, down from 7.3 percent in 2014.

A2 The two key measures of a successful transition are consumption and credit. A greater role for consumption in driving growth is essential to offset fading exports and excessive investment. Slower credit growth is crucial to head off risks to financial stability. A big part of the solution to both problems is a more efficient financial system.

A3 The biggest risk for China in 2015 is a correction in the real estate sector. My observations from the data and from traveling to cities around the country point to one conclusion: there is too much of construction. But a slowdown in construction threatens to dent demand for everything from cement to air conditioners. The government can cushion the blow by ramping up the construction of affordable homes.

A4 The lesson from 35 years of reform and opening-up is that China's biggest resource is the determination and ingenuity of its people. The best way to utilize those strengths is to create a level playing field where everyone has a chance to succeed.

A1 We expect GDP growth to slide to 7.1 percent year-on-year in the first quarter of 2015 and slow further to 6.7 percent in the second before stabilizing in the second half .We believe that the down trend in growth will be mainly driven by domestic challenges, especially the slowdown in investment growth.

Consumption could holdup reasonably well, given the still tight labor market and rather robust income growth, while foreign demand may also improves lightly. But these factors are unlikely to offset the negative impact of the investment slowdown or resolve the severe overcapacity in many upstream industries.

A2 With a healthy slowdown, we expect gross capital formation growth to slow and the investment-to-GDP ratio to fall in 2015-16. Moreover, the ratio of aggregate financing to GDP is also likely to decline, indicating deleveraging may finally take place.

A3 We believe the property market correction will continue through 2015, and there will be stricter control over local government borrowings. Together, these will weigh on fixed asset investment growth.

To avoid a sharp slowdown, we expect the government to loosen fiscal and monetary policies.

A4 With a lower growth target, we believe reform will quicken, including that of State-owned enterprises, the government budget system, overcapacity cuts in upstream industries, interest rate liberalization, public utility rates and environmental protection.

A1 Our forecast for 2015 full-year GDP growth is 7.2 percent, with consumption, investment and net exports contributing 3.4 percentage points, 3.1 percentage points and 0.7 percentage point, respectively.

The fundamental growth drivers may not change much in the near term, despite on going economic rebalancing.

A2 Despite the gradual slowing in GDP growth, signs of economic rebalancing are encouraging. Notably, the service sector is making up a larger share of the economy, the labor market has remained relatively stable and there has been a gradual rebalancing in the distribution of national income toward the household sector and away from the corporate and government sectors.

We expect adjustment in the property sector and overcapacity in several industries will continue to weigh on manufacturing in 2015. But the service sector will likely continue its stable expansion. Thus, we expect continued, steady economic restructuring.

A3 The real estate market slowdown turned out to be the biggest macroeconomic drag in 2014.The property market adjustment will continue in 2015 as oversupply persists. This adjustment is having a significant impact on overall growth. Real estate investment growth will slow from 20 percent in 2013 to about 11 to 12 percent in 2014. We estimate that will shave one percentage point from GDP growth.

However, the financial impact of the real estate market correction has been less than expected.

Housing prices may decline further but should stabilize in the second half of 2015.

A4 Economic reform will continue in 2015 and be the largest source of resilience. We expect further reforms in financial, fiscal, administrative, State-owned enterprise, housing and land policies.

We expect many small steps in all areas including interest-and exchange-rate reforms, capital account openness and yuan internationalization.

A1 In our latest OECD Economic Outlook, published in November, we forecast 7.1 percent growth for 2015 and 6.9 percent for 2016.

A2 One indicator is the ratio of consumption to GDP. A significant increase in that indicator would signal rebalancing toward a more stable growth path, since consumption-driven economies are less prone to boom-bust cycles than investment-driven ones.

A3 A major concern is a sharp slowdown. A correction is underway in the property sector and to a lesser extent in industries with excess capacity. The authorities are trying to rein in shadow banking. The challenge is to maintain sufficient momentum to reduce imbalances while avoiding abrupt adjustments that might trigger a crisis.

A4 While demand has played an increasing role in recent years, exports remain an important driver of growth and will benefit from the revival of the US economy. Opening new sectors to private investment, in particular in services, would support domestic consumption, including e-commerce.

(China Daily Africa Weekly 01/09/2015 page14)