Illustration: Henry Wong
China's leaders aim to shift the economy from a reliance on investment and exports for growth to one where consumption and markets play a bigger role.
Economists and analysts are watching seven areas for quickening policy change that could bolster economic restructuring this year.
They include a pick up in domestic demand, cheaper oil, energy-pricing reforms, improved welfare cover and a wave of privatisations.
Whether initiated by policymakers or generated by external events, these are areas most likely to spur a boost for the world's second-largest economy this year:
Domestic demand comes alive
China's shift to consumption-led growth was part of a dramatic change that would offer "fantastic opportunity" to the developed world, said Stephen Roach, former chief economist at Morgan Stanley.
The nation's economic engine was shifting gears from being a producer of exports to being a consumer providing demand for the rest of the world, said Roach, now a senior fellow at Yale University's Jackson Institute of Global Affairs.
"2015 could well be the year when China demonstrates that it is very much in control of its destiny - that it can contain the downside of a carefully engineered slowdown without succumbing to the dreaded hard landing that so many believe is inevitable," he said.
"The domestic demand story is about to come alive in a way we have never seen."
Oil tail wind
The tumbling price of oil and other commodities had made China the "grand winner" of recent turmoil in world markets, enabling it to save on its bills for oil, coal and gas and to add to its strategic energy reserves on the cheap, saidKenneth Courtis, former Asia vice-chairman at Goldman Sachs Group. Cheap oil could help China's economy in 2015. Photo: Reuters
The drop in energy prices would keep inflation low and producer prices negative, leaving lots of space to trim interest rates, said Courtis, chairman of Starfort Holdings.
"In the wildest dream of great news for the Chinese economy, no one could have dreamed of such a positive scenario," he said.
The oil-price shock also provides the "perfect opportunity" for market-driven change in energy, says Derek Scissors, a scholar at the American Enterprise Institute in Washington who focuses on economic issues in Asia.
China could take steps to have a more efficient energy sector by cutting or eliminating subsidies, said Scissors.
"The conventional wisdom is that China faces a choice between supporting economic growth with stimulus and implementing reform for long-term efficiency," said Scissors.
"Low oil prices, however, are natural stimulus for a large energy importer. In 2015, China has the opportunity to cut or eliminate energy subsidies - thus bringing demand, supply and price closer to their market levels - without inflicting higher costs on households or firms."
Hukou reform
Liberalisation of the hukou household registration system in small- and medium-sized cities coupled with welfare reform could help cut precautionary savings and spur consumption, said Louis Kuijs, Royal Bank of Scotland Group Plc's chief greater China economist in Hong Kong.
The current system denies many citizens the right to public services including medical care and education.
"The Hukou reforms should help China move towards more full urbanisation, with migrants better able to live like proper urban citizens, thus facilitating the rebalancing of the pattern of growth," said Kuijs, who formerly worked at the International Monetary Fund and World Bank.
Privatisation wave
A wave of privatisations may be coming as local governments seek to offload assets including highways and even some state- owned enterprises, a Deutsche Bank AG report said.
"This should help to promote productivity in the economy and boost the growth outlook," Hong Kong-based economists Zhang Zhiwei and Audrey Shi wrote in a note in December.
More than 10 million new businesses registered from March to November after red tape was cut, according to the State Administration for Industry & Commerce.
Privatisations may increase momentum for the "new" economy, including private output, which is already outperforming the "old" China.
China's attempts to introduce market-driven change would have a more hospitable backdrop in 2015 as exports got a lift from a broadening economic recovery in developed markets, and as monetary policy remained easy globally and commodity prices low, said Goldman Sachs.
There would be further progress in the liberalisation of interest rates with the removal of the deposit-rate ceiling looking possible, economists led by Beijing-based Yu Song said in a note in December.
Key to upside potential will be benign outcomes for debt and the labour market as economic growth moderates.
Given inflows to the trust industry and a heavy debt repayment schedule for property developers, a few defaults were likely, said Dong Tao, chief regional economist for Asia excluding Japan at Credit Suisse Group AG in Hong Kong.
"But whether these defaults are isolated cases or something that would trigger a kind of chain reaction at a national level is a big question mark," he said.
"It looks like the government and the central bank is playing some tricks to circulate liquidity to the system so cases of default do not create a big splash."
With services sector growth accelerating and the working- age population shrinking, China could create the jobs it needs with lower rates of expansion, said David Loevinger, former US Treasury Department senior coordinator for China affairs.
"No economic implosion, no mass social unrest, and no banking crisis," said Loevinger, an analyst at TCW Group in Los Angeles.
"This could be the year where the misguided notion is finally put to rest that China is somehow different, that it needs to sustain growth in the high single digits or all hell will break loose."
This article appeared in the South China Morning Post print edition as Year of the Bull
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Illustration: Henry Wong
Cheap oil could help China's economy in 2015. Photo: Reuters
Illustration: Henry Wong
Cheap oil could help China's economy in 2015. Photo: Reuters
