10 Mar 2015
Critically, China has lowered its 2015 gross domestic product target to around 7.0 per cent.
"So-called 'Road and Belt' and 'Go Abroad' initiatives will become important policies to encourage Chinese firms to invest abroad in emerging economies."
Li-Gang Liu, Chief Economist, Greater China
Our view is given the government will focus on implementing key economic and structural reforms this year, the economic growth forecast is likely to face some downside risks. We believe China's economy will expand 6.8 per cent in 2015.
We see a few very important new reform initiatives.
Outlook
Given the government focus on the implementation of economic and structural reforms spelled out by the 3rd plenum document, our view is there is not much upside for economic growth. In addition, a new incentive structure to evaluate local government performance is likely to be adopted.
During this transition, economic growth is likely to face some downside risks. We thus maintain our forecast that China's economy will expand 6.8 per cent in 2015. Regarding the growth trajectory, we see that China's economy will grow by 7.0 per cent in the first half of 2015 but moderate to 6.5 per cent in the second half due to base effects. We forecast that CPI inflation will be around 1.8 per cent this year, down from 2.0 per cent in 2014.
More broadly, there are signs China may allow state-owned enterprises (SOEs) to issue RMB-denominated bonds in other offshore centres outside of Hong Kong. Offshore RMB bond issuances by financial institutions may no longer require case-by-case approvals and the Shenzhen-Hong Kong Stock Connect may be approved in H1 and be launched in 2015.
The ruling party will maintain the target of newly created jobs at 10 million, unchanged from last year. Specifically, the government lowers the growth target for fixed asset investment to 15.0 per cent from 17.5 per cent in 2014.
The growth targets of foreign trade and retail sales have been lowered by 1.5 percentage points to 6.0 per cent and 13.0 per cent, respectively. The CPI inflation target is lowered to 3.0 per cent this year from 3.5 per cent in 2014. CPI only rose 2.0 per cent last year and is expected to trend lower on sluggish domestic demand.
We believe setting a relatively high inflation target may indicate authorities would like to push forward the factor (utility, energy and land) pricing reform to allow the markets to allocate resources.
On the monetary front, the M2 growth target was set at 12 per cent this year, down from 13 per cent last year. While a lower M2 target suggests massive monetary policy easing is unlikely, we believe the central banks will still need to cut both the reserve requirement ratio (RRR) and deposit rates this year subject to capital outflows, deflation risks and economic slowdown.
Premier Li said China will flexibly use monetary policy instruments this year, including open market operations (OMOs), interest rates, reserve requirement ratio (RRR) and re-lending. China will further promote interest rate liberalisation and improve interest rate transmission framework.
Chinese authorities will strengthen the management over local government debt. The Ministry of Finance said that China will release the local government debt data on a regular basis, improve the maturity structure of local debt and impose a quota management system on the local debts. Premier Li said that China needs to strike a balance between debt management and stabilising the growth. The local governments will be allowed to issue special purpose bonds to mitigate the financial risks.
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
10 Mar 2015
10 Mar 2015