Top legislature to stage balancing act over reform and growth

The upcoming parliamentary session in Beijing could offer a peek at how China plays out a delicate balancing act between honoring its promise to reform the country's outdated growth model and guiding the economy through headwinds.

Analysts say economic scrutiny over the government report to be delivered by Premier Li Keqiang on Wednesday goes beyond the growth target to how the administration will execute the ambitious reform package released in November.[Special coverage]

Lawmakers around the nation will meet in Beijing on Wednesday to discuss a spate of reforms that will groom the world's second-largest economy for more sustainable growth, as the old way of bureaucratic meddling and debt-fueled expansion has reached its end.

Hong Pingfan, Chief of Global Economic Monitoring Unit, said though the scaling back of quantitative easing could have an impact on the Chinese economy, growth is largely determined by how authorities advance the country's economic reform agenda.

The growth target set each year during the National People's Congress (NPC), China's top legislature, has been widely seen as the bottom line the authorities can tolerate for economic expansion.

Peng Wensheng, chief economist at China International Capital Corporation (CICC), expects the growth target to stay unchanged as the government wants to ease investors' concerns over a significant slowdown in the Chinese economy.

Lu Ting, chief economist of Bank of America Merrill Lynch, expects the target to be announced in the parliamentary sessions to be combined with a "growth floor" to carve out a band for growth.

The idea of formulating a flexible range for growth has gained validity among analysts, as concrete steps to implement reforms could sacrifice at least part of the output from an outdated growth model.

In the Central Economic Work Conference held in December, authorities indicated that growth should go hand in hand with improving efficiency and quality, with less policy hangover on the economy.

"China's macro indicators never looked bad. The government would always try to let the economy grow twice as much as inflation," said Chen Xian, the executive dean of the School of Economics at Shanghai-based Antai College of Economics and Management.

"Growth will continue to stay in the 7.5-to-8.0 percent range, but the government has to watch for risks coming from sectors saddled with overcapacity and local governments having trouble repaying their debts." Chen added.

Authorities are also likely to maintain their neutral stance over monetary policy, and likely with a tightening bias.

"My biggest concern is monetary policy," said Qian Junhui, a professor with Antai College of Economics and Management. "The central bank will not loosen its grip on liquidity, but more debt will come due this year. Newly added loans could be used to repay old debt, which would drain liquidity."

China underwent several bouts of cash crunch in 2013. The worst crunch in June saw a record high spike in the interest rate banks charge each other for short-term funds in the interbank market, forcing the central bank to intervene with a massive cash injection.

That said, the central bank is expected to prevent dramatic swings in money rates this year through policy tools instead of massive cash injections, according to the CICC.

The ongoing anti-corruption drive and frugality campaign could also weigh on investment and consumption in the short term, but will correct distortions in high-end consumption and stimulate mass consumption in the long run.

There have been reports that some high-end restaurants have reinvented their marketing strategies to appeal to middle-class consumers. Hotels have gone even further by downgrading their star ratings after losing their traditional patrons in the frugality campaign.

Authorities are expected to make bolder moves to liberalize China's financial sector. The country is also expecting a deposit insurance scheme as a necessary step to fully liberalize interest rates. This will work in tandem with greater flexibility in the exchange rate regime. The central bank's recent move to purchase more foreign reserves has bucked the yuan's rising trend against the greenback.

The government will also focus on containing the risks stemming from local government debt and China's shadow banking system.

The government is expected to overhaul the current financing scheme for local government and explore a new model based on asset-liability balance sheets compiled for central and local government.

An official audit of local government debts released late last year found the size of local government debt to be generally manageable, but also cautioned against a fast growth rate and the rising volume of short-term obligations.

Still, the key measurement to watch for this year's session may not be growth rate, but the extent to which these reforms contribute to quality expansion.