Ten predictions for China's economy in 2015(2)

4. The reform will go from the planning phase to implementation, as the benefits of reform be released more quickly.

Last year was the gestation period of reform as the new administration of the government was formed. The Third Plenary Session of the 18th Central Committee of the CPC was held and the meeting's decision documents map out the general guideline for the reform, while the Central Leading Group for Comprehensively Deepening Reforms emerged. This year is the preparatory period for the reform. Various parties have started detailing the solid schemes for every reform. Since Jan. 22, the leading group has had five meetings and has released guideline documents for financial and tax reform, judicial reform, household registry reform, land reform and cultural reform. More than 40 of the 60 reform tasks proposed by the leading group's decision have already launched.

In 2015, the reform will go from planning to implementation. For the reforms mentioned above which have been submitted to the leading group, the implemention process will be relatively fast. But considering pressure of the presumption that the economic growth will likely slow next year, and room for flexibility in fiscal and monetary policies is limited, financial, tax and land reform may be the most important moves to stabilize economic growth and restructure the economy. For example, promoting and regulating local government bonds will lower the financing costs, optimize the debt structure, reduce the systemic risks and resolve financing difficulties in public investment, which will help steady growth.

As for the reforms that have not been discussed by the leading group, the following may happen in the near future:

First, financial reforms, such as the adjustment of the loan-deposit ratio, deposit insurance companies, the registry system and private banks. Second, reform of stateowned enterprises, for example, the rights and responsibilities of the State-owned Assets Supervision and Administration Commission and the Ministry of Finance are expected to beclarified. Third, reform of the science and technologies innovation system. The Chinese Academy of Sciences has made breakthroughs, moving forward quickly, while other government departments and institutions will expect speedy process soon.

5. The real estate market will see momentary recovery and central government control will return to normal.

The new administration of the government has a clearer control approach. For one, it will not make real estate a tool, so the policies will be kept restrained and prevent speculation demands. The full stimulus of 2009 will never appear again. On the other hand, real estate is a very important sector in China's economy, so real estate will not be "demonized." The early policies seemed "too tight" and restricted "reasonable" housing demands. Recently, approaches such as limited loan adjustment have loosened some limitations.

However, from the current status, the loosening is not clearly effective. Sales of real estate have not improved, and the year-on-year drop has enlarged even further. For one, it is because last year's base was high, for another, the new policies have not rolled out so buyers are just watching and waiting for banks' specific benefit approaches.

From the mid-term perspective, as loosening may be more relaxed, the 2015 real estate market may experience a short term recovery. First loan loosening may have a bigger influence than the loosening of the property-purchasing limitations. This will push forward real estate sales by increasing loans, lowering loan costs and lowering down payments. At the same time, banks' special financial debts and promotion of mortgage-backed securities will help reduce the banks' debt costs and increase the impetus to configure mortgages.

But the revival of housing market will mainly be measured in sales. Housing prices and development investment will not see a real pickup, due to the pressure of the high stock, continuing tightening of banks' development loans and more. This will drag down the performance of the general economy and cyclical sectors.

In the long term, when policies shift from being "too tight" to "normal," the big and unusual stimulus policies will not come out again. China's real estate market will enter a long time adjustment period under the downturn pressure of population aging, interest rate marketization, global liquidity deflation and property tax, as well as the upward motivation from urbanization and asset value increase demands.

6. Inflation will be higher than 2014, with reduced pressure.

Predictions expect China's consumer price index (CPI) to rise 2.4 percent year-on-year in 2015, therefore general price rises will be higher than last year. But CPI growth is expected to be moderate, and the pace throughout the whole year will be "high at the beginning and low at the end." Firstly, in terms of statistics, the carryover effect of 2015 will be more than that of this year. Secondly, food supplies (especially pork) will continue to decline, and food prices will face upward pressure. Lastly, in the fourth quarter of this year and the first half of next year, the real estate market and the economy as a whole will probably be better than the last half of next year. So the general economic demand will be "high at the beginning and low at the end."

It is predicted that PPI will continue its negative growth next year. Considering the economic goal will be lowered next year, the urgent situation in the excess capacity of industrial goods will not improve significantly, steady economic growth is having a weaker effect in raising the month-on-month growth of PPI. It'll take some time for PPI to return to positive year-on-year growth. Although during the round of regulatory reform in 1993, capacity was sharply cut, this time macro-economic policies stress that there have to be bottom line considerations and the bottom line of systematic financial risks needs to be kept to, capacity reduction will be more moderate compared to the last round. Even though since 2013, government organs of or above ministry level issued documents ordering capacity cuts, excess capacity hasn't been forcefully removed. This means it will take more time than the last round for industrial goods to reach a supply-and-demand balance and for PPI to achieve positive growth.