China braces for slower but better growth in 2015

As banks and economic think tanks anticipate the publishing of China's full-year 2014 economic data in late January, many are predicting slow but higher quality growth for the world's second largest economy in 2015.

The most recent report by Standard Chartered forecast China's gross domestic product (GDP) to further decelerate to 7.1 percent in 2015 from an expected 7.3 percent in 2014.

A more moderate growth rate with stable growth engines is being hailed as the "new normal" for China's economy.

In the third quarter of 2014, growth slid to a low of 7.3 percent, a rate not seen since the 2008/2009 global financial crisis, dragged down by a housing slowdown, softening domestic demand and unsteady exports.

The bank based its forecast on the trend already shown in 2014, with growth in electricity, cement and steel-product production - all considered reliable indicators of industrial production and fixed asset investment - falling by an average 8 percentage points.

Standard Chartered forecast was in line with the outlook provided by China's central bank, the People's Bank of China (PBOC), which predicted the country's GDP growth would "slow modestly" in 2015 to 7.1 percent.

In its working paper released in December, the central bank estimated the country's GDP growth for 2014 at 7.4 percent.

According to the research group led by Ma Jun, chief economist of the PBOC's research bureau, fixed asset investment growth will soften to 12.8 percent in 2015, down from an estimated expansion of 15.5 percent in 2014, dragged by slower investment into the real estate sector.

The property sector has been an important driver of growth China for most of the past decade, as housing prices soared and construction of new apartments mushroomed across the country.

After climbing at double-digit rates through most of 2013, housing prices in China started to cool in late 2013. The downturn continued in 2014 and spread to most major cities. Property investment, which affects more than 40 other industries, also cooled.

The 7.1-percent forecast was more or less in line with that provided by a government think tank, the Chinese Academy of Social Sciences (CASS), which expects China's economy growth to decelerate to 7 percent in 2015.

CASS attributed its moderate forecast to the country's external demand which is unlikely to rebound remarkably, its investment which is unlikely to keep growing rapidly due to overcapacity, weak innovation capabilities and high inventory in the property market, and a stabilizing consumption.

China International Capital Corporation (CICC), the country's largest investment bank, painted a less pessimistic picture for the 2015 economy, saying the country will be able to clinch a 7.3-percent growth.

The investment bank said the monetary and housing market policies are likely to gradually shift from being "relatively tight" to "loose and normal" in 2015, and the fiscal policy would stay proactive.

In addition, the property sector will probably exert a much smaller drag on economic growth in 2015. The sector is expected to drag down China's 2015 GDP growth by 0.3 percentage point, compared with one percentage point for 2014, according to the CICC forecast.

Being it 7.0 percent, 7.1 percent or 7.3 percent, the growth rate will be much slower than the average for the past 35 years. Between 1978 and 2013, annual growth of the Chinese economy averaged close to 10 percent and, between 2003 and 2007, more than 11.5 percent.

Instead of this "old normal" economic growth featuring high speed and excessive reliance on investment, export and resources, the world's second largest economy is striving to shift gears to adapt to the "new normal" of slower speed, higher quality and more innovation.

At the tone-setting Central Economic Work Conference in December, Chinese leaders decided to adopt "a proactive fiscal policy which should be stronger, and a prudent monetary policy, which should be more focused on striking a proper balance between being tight and loose."

Standard Chartered expects China to set a lower growth target of 7 percent for 2015, compared with 7.5 percent in 2014, saying "achieving this will not be easy amid the rising challenges of a weakening labor market, disinflationary pressures and relatively high lending rates."

The conference fell short of setting a target for 2015, but said the authorities will be "reasonable" in setting such goals.

China's policy-makers are fully aware of the challenges, saying at the conference that the economy still faces many challenges and "relatively big" downward pressures such as increasing difficulties for businesses and the emergence of economic risks.

However, the leaders reassured the market that China can deliver its social and economic goals for 2014 "relatively well," and they believe moderate slowdown is a price worth paying for a more balanced and sustainable economy growth.

Consumption is expected to contribute 50.9 percent of GDP growth next year, up 0.9 percentage point from this year, investment will account for 46.8 percent of economic growth, down 0.9 percentage point, while exports will contribute 2.3 percent, according to the PBOC paper.