Setting the tone for China 2015

If you are in my WeChat sphere you would know that I have been both busy and excited since last month. I've been chasing this chance for so long and that's why I haven't been posting often from September.  I got an assistantship with an awesome professor and I will formally delve into China's economic future in the mid-long term (new normal, mid-high growth, structural reform, whatever it is called). So I will constantly write my own version of  economic reviews for China and other related regions and post them here. If you are interested in China's financial market and macroeconomic policy, you can find some useful facts and ideas here. All the ideas her are inspired by Prof. Ju and the misconceptions are of course mine. : )


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China's Jackson Hole equivalent, the Central Economic Work Conference, convened in Beijing on 9th, December, which is today. The conference is to determine China's macroeconomic strategies and development goals for the subsequent year. A proper interpretation of the meeting's working paper is the key to next year's business success and investment triumph.

There are a lot to expect from this confidential conference. First, China's GDP growth target. The goal should still be set anywhere above 7% to ensure a doubled gross domestic product by 2020, but may be below 7.5% for 2015, allowing space for the market to digest the economy's downward drags. The reality is,  China could no longer sustain its previous growth model driven by low labor costs, huge fiscal expansion and state sector investments, while the new normal emphasizes steady and moderate growth fueled by household consumption, business innovation and the development of the service sector. 

Second, PBoC's monetary policy. Unfortunately, Chinese central bank's qualitative easing measures, namely the PSL(Pledged Supplementary Lending), the targeted interest rate and reserve ratio cut, didn't establish a valid market expectation thus failed to realize its assumed goal. The overall interest rate cut on 22nd November embarked on a new round of monetary expansion, despite PBoC's iteration of its prudence. We can expect a reserve ratio cut after the conference concludes on 11th and before January.

Third, the risks and opportunities. It is interesting to observe an unusual upsurge in the Shanghai Composite Index that rocketed over 3,000 on Monday and plummeted back to 2,800 today. This fluctuation was partially accredit to the Shanghai-Hong-Kong Stock Connect program, and greater volatilities will become a normality for China's stock market after the short selling mechanism and T+0 transaction is permitted next year. On the other hand, China's real estate market has bottomed out, with Beijing and Shanghai showing positive growth in housing price. This lowered the risk of massive credit crunch in China's banking system, which has been deleveraging since 2012. 2015 may be another booming year for real estate investments, similar to that of 2007 and 2009, when the business cycle has entered the expansion phase.

In short, my tone for China's 2015 economy is reserved optimism. The market reform in state sectors and the financial market liberalization will contribute to higher capital efficiency for the economy as a whole. Online business and banking, namely Alibaba's Taobao and Alipay, still has potential territories to explore, by targeting on China's mass populated senior citizens and importing authentic foreign labels to set up official web shops on T-mall. Nonetheless, the excess capacity in China's traditional industries forms a barrier to industrial upgrade and innovation. The coming five years for China is critical. To find the new engine for economic growth determines if China would fall into the middle income trap, or successfully evolve into Asian's largest developed country. 

This entry was posted on Tuesday, 9 December 2014 and is filed under ,,,,,,. You can follow any responses to this entry through the RSS 2.0. You can leave a response.

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