Behind the reform agenda of China's national congress

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.

• So-called 'Road and Belt' and 'Go Abroad' initiatives will become important policies to encourage Chinese firms to invest abroad in emerging economies in the Ancient Silk Road Region and Maritime Silk Road countries. Specifically, Premier Li said China seeks to increase the international market shares for railway and power.
• There will also be an acceleration in financial reform. China will maintain the RMB exchange rate at a reasonable and equilibrium level and increase the two-way flexibility of RMB exchange rate. China will expand the global usage of RMB and the capital account will be liberalised further, including a launch of a pilot scheme for individual outbound investment and Shenzhen-Hong Kong Sock Connect. The People's Bank of China said the deposit insurance scheme will be implemented this year.
• China will deepen reforms of state-owned enterprises (SOE) and clarify the function of different types of SOEs. A new round of hybrid ownership reform will be kicked off and the private sector will be encouraged to participate in the process. The power, oil and gas industries could become the key sectors to be involved into the reform this year.
• Household consumption will be encouraged as will spending on environmental protection. Premier Li Keqiang said China will further open the services industry and encourage the development of healthcare, travel and innovative industries. Notably, the government will increase the coverage ratio of healthcare insurance to 95 per cent of the residents.
• China will cautiously push forward the rural land reforms. China will initiate a pilot programme this year, under which the right of use for existing collectively-owned rural construction land can be transferred, leased and traded for shares.
  
  

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.