President Xi spells out China’s New Normal

December 30, 2014 by Nicole Lam

The Central Economic Work Conference (CEWC) concluded on 11 December, where Chinese leaders including President Xi Jinping, Premier Li Keqiang and other senior officials mapped out major economic policies for the year ahead. New economic reforms were a key topic during the conference. President Xi’s concept of the “New Normal” took center stage and leaders came up with a five-point road map for 2015. The main aim is to maintain growth stability while boosting efficiency and seeking development.

The “New Normal” is used to describe below-average growth after the 2007/2008 global financial crisis, characterized by a shift from high speed growth to medium-to-high growth, a shift from production expansion to improving current production and a shift from growth being driven by traditional sources to driven by new growth points.

Central authorities also stated that “China must understand the new normal, adjust to the new normal and develop under the new normal”. These reforms are expected to transform China’s future growth points and sustain the country’s development in the long term.

President Xi acknowledged that China still faces many challenges and “relatively significant” downward pressures. Certain sectors have become overheated, hence more efforts will be made to transform the reforms into growth drivers. Real estate, consumption, trade and investment have all shown signs of sluggishness, and China’s labour advantage in international trade has been gradually diminishing due to rising labour costs and currency fluctuations. Thus the new norms require new thinking in the government’s economic initiatives and policies.

To reach the 2015 goals, the leaders will accelerate reforms in nine areas, including capital markets and market access, creating a more favourable environment for entrepreneurship, competition and innovation and at the same time allowing the market to determine the allocation of resources.

The problems of state-owned enterprises (SOE) will also be addressed and efforts made to improve efficiency and core competitiveness. Apart from growth and reform, the government has also decided to devote more resources to the rural sector, enhance regional integration and improve people’s livelihoods.

The central bank’s decision to lower the benchmark rate by 40 basis points to 5.6% and lower the deposit rate by 25 basis points to 2.75% was a good example of how Beijing is becoming more forceful in boosting growth in the economy. This is the first rate cut since July 2012 and follows a series of policy interventions aimed at indirectly stimulating the Chinese economy.

The CEWC meeting was especially important after a rocky year for the nation. China grew at its slowest pace in recent times, dragged down by a housing slowdown, unsteady exports and low domestic demand. Although downside risks brought by the US Federal Reserve’s rate hike, weakening of emerging markets and geopolitical conflicts remain, according to World Bank estimates the world economy will continue to grow slowly, expanding 3.1% in 2015 and 3.3% in 2016, with China’s GDP expected to grow at 7%.

As mentioned, one of the reforms introduced in the CEWC meeting was measures to improve market and capital access for foreign and domestic companies. The China Securities Regulatory Commission lifted the 15-month ban on new share sales earlier in January 2014 and has recently approved 12 companies listing applications. This brings the total offerings to 78 out of 100 targeted for the year. It is known that the commission has often used the pace of new offerings to control the market, as quick approval at times might drain liquidity out of existing stocks, leading to equity influx and potential market distortion.

Such a move has bolstered investor confidence and the Chinese equity market has been picking up steam, regaining grounds loss in the last two quarters. The launch of the Stock Connect programme in November 2014 and the People’s Bank of China’s (PBOC) recent interest rate cuts has further sparked a global stock market rally and has had a hand in boosting investor appetite. Both the Hang Seng Index and Shanghai Index responded with enthusiastic advances and it would be safe to say that the equity capital markets have reopened at this time of year, tempting investors to flock back into the equity market and savers away from low-yielding investment products.

Ping An Insurance, the second largest insurance company, was able to raise $4.7bn private share placement in December after a failed attempt a month earlier. The Industrial and Commercial Bank of China (ICBC) also issued $12.9bn worth of preferred shares via placements in both Shanghai and Hong Kong, while Nirvana, the Malaysian death care firm, raised around $261mm in total and priced its initial public offering (IPO) at the bottom of its indicative range. Furthermore, China’s leading nuclear energy producer, CGN Power, raised over $3.2bn through public offering in mid-December, surpassing HK Electric’s listing to become the biggest IPO in Hong Kong in 2014.

A promising pipeline is also expected, including Dalian Wanda Commercial Properties $3.7bn IPO, BAIC Motor Corp $1.5bn IPO, Bank of Shanghai $2.0bn IPO and many more. However, scepticism remains as Wanda is trying to come to market at a time when real estate has been underperforming. Despite various efforts to stimulate the property market, housing sales remains slow and securing bank loans has become more difficult. However, the company has been able to price its shares at the high end of an indicative range. Other industries – for example, financial institutions and technology – also seems to be doing very well when entering the market. Momo Technology, a Chinese social networking website, successfully secured $216m financing from a public listing on Nasdaq.

To conclude, China GDP is expected to grow at a moderate pace of 7.1% in 2015 according to PBOC estimates. With the upcoming Central Rural Work Conference (CRWC), many believe 2015 is a key year for China to continue the country’s comprehensive reforms and a more active capital markets is expected. We should expect to see more policies initiated by the central government and China’s presence will increasingly be felt within the international community.

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