Caution and commitment in Government Work Report

A lower growth target is in line with the emphasis in the report on the new normal and the need to stress the quality of growth rather than the quantity. But at the same time, as noted, growth remains a key objective of policymaking.

Meanwhile, the downward pressures on growth - in large part stemming from the weakness in real estate - are likely to persist in 2015, especially in the first half of this year. Therefore, accommodative macroeconomic policy will be needed to ensure that GDP growth will not fall too much below 7 percent. Will such a macro stance materialize?

On the fiscal side, the government targets a higher official fiscal deficit but keeps it below 3 percent of GDP. As the space for monetary policy expansion is constrained by the already high leverage, it makes sense to rely more on proper (bond-financed) fiscal policy to support growth. In addition, borrowing from the financial sector by local government investment vehicles - which has amounted to 4 percent of GDP or so in recent years - is meant to be constrained this year by the introduction of a new framework to better regulate and monitor local government borrowing. Thus, in order to avoid a "fiscal cliff" - a dramatic squeeze of the associated infrastructure spending - it makes sense to raise the official fiscal deficit. However, China's government remains reluctant to accept significantly higher official fiscal deficits.

The rise in the total fiscal deficit from 1.8 percent in 2014 to the 2.3 percent budgeted for 2015, with additional spending financed by savings from last year's budget, constitutes a significant fiscal expansion. Nonetheless, only a modest part of the local borrowing from the financial sector has been officially converted into an official fiscal deficit. This means that, realistically, some of the borrowing from the financial sector by local government investment vehicles will need to continue this year to avoid a "fiscal cliff".

On the monetary front, the report does not indicate a major change in stance or operational toolkit. The government commits to maintaining steady growth of credit and aggregate financing and increasing the velocity of monetary aggregates. With regard to the toolkit, the report commits to using both interest rates and various quantitative instruments

Concretely, the central bank will likely further cut benchmark lending and deposit interest rates this year, carry out more domestically-oriented monetary operations including further cuts in the reserve requirement ratios amid much lower foreign reserves inflows, and management of banks' credit quota and loan-to-deposit ratios is bound to remain accommodative.

Looking at the reform plans in various areas, there are relatively concrete plans in several areas where reform is politically relatively easy and/or where reforms are good for growth or relieving financial constraints.