Economic data move toward new normal

Other growth drivers remain broadly intact, though. Infrastructure investment should continue to be supported by policymakers’ reliance on such investments to support growth, although the implementation of the new local government debt framework does pose downside risks. Consumption should continue to benefit from a solid labor market and low inflation, while the outlook for exports is reasonable.

Key risks to the outlook include a more pronounced global monetary and exchange rate upheaval, weaker global trade growth and, in China itself, a more pronounced downturn in real estate, lower infrastructure investment following the implementation of the local government debt framework, and jitters in financial markets on the back of credit events.

Policy support will be needed to achieve GDP growth of close to 7 percent in 2015 — the likely growth target for this year — but policymakers will remain reluctant to move toward major, high-profile stimulus measures in line with their emphasis on “the new normal”, instead of stimulus. On the fiscal front, while infrastructure investment will remain a focus this year, there is no major stimulus in the pipeline.

On the monetary front, calls for policy to support growth and contain borrowing costs will be balanced with the need to rein in the rise in leverage and financial risks. The People’s Bank of China has largely continued to implement “targeted” monetary policy measures instead of high-profile measures such as required reserve ratio (RRR) or further interest rate cuts. Earlier this week, the PBoC increased relending to financial institutions that serve agriculture and small companies. Another factor holding back an RRR cut has been large inflows into the equity market in recent months, in part fuelled by margin trading financed by the shadow banking system, although measures announced last Friday by the China Banking Regulatory Commission and China Securities Regulatory Commission to rein that in seem to have had a major dampening impact on the stock market and may make an eventual RRR cut more likely.

The author is chief China economist at the Royal Bank of Scotland.