Economic Watch: Reform brightens China's economic prospects

Following the news that last year growth slowed slightly, proactive reforms will remain high on the agenda throughout 2016.

The Chinese economy grew 6.9 percent year on year in 2015, down from 7.3 percent in 2014 and 7.7 percent in 2013, official data showed.

Although the slowest annual expansion in a quarter of a century, the growth rate stands testament to the choice to focus on structural reforms over massive stimulus packages.

In the face of flagging exports, sluggish investment and a property market downturn, the government remained clear-headed, and the central bank held back credit expansion.

Instead, China let the markets take the lead.

To this end, the central government loosened its grip on market controls, simplified administration procedures, encouraged the establishment of small businesses, held the torch of innovation high and welcomed more rural migrants to its expanding metropolitan areas.

Despite headwinds, the private sector energized febrile economic engines and played a decisive role in propping up growth.

"The growth rate is in line with government's target and follows new macro regulation," said Wang Baoan, head of the National Bureau of Statistics (NBS).

Given the gloomy global climate, most major economies could not even dream of posting China's growth rate.

Domestic and overseas economists have predicted that the economy will continue to "hold steady within a proper range this year."

Nearly 70 percent of economists responding to a poll by yicai.com expect GDP growth to be somewhere between 6.5 percent and 7 percent in 2016.

A report from the Chinese Academy of Social Sciences set the growth rate at 6.7 percent for this year. The World Bank also forecast 6.7 percent, while Zhu Haibin, J.P. Morgan China chief economist, maintained his full-year growth forecast at 6.6 percent.

"The economy will likely start to hold steady at the beginning of the year as policies and reform measures continue to take effect," said Zhang Liqun, researcher with the Development Research Center of the State Council.

China has made progress in restructuring the economy to sustain growth.

Domestic consumption and the service sector have become stronger forces driving economic growth. Consumption contributed 66.4 percent to GDP in 2015, up 15.4 percentage points from 2014, while the service sector created more than half of GDP for the first time ever.

UBS economist Wang Tao said she expects consumption and retail sales to be relatively resilient this year thanks to measures to boost employment and improve the social safety net.

Robust emerging industries are being fostered, and outdated and excessive production slashed.

Emerging industries and new business models became bright spots in the slowing economy. Online retail sales surged 31.6 percent and the growth of high-tech industries reached 10.2 percent, both well above the general average growth.

New industries such as e-commerce and new energy vehicles have added confidence, Wang said.

China prioritized overcapacity reduction in its economic tasks in 2016 as saturated sectors like steel, coal and cement have become a major drags on the broader economy.

The policy may impact short-term growth but will be a boon for sustainable development in the long run, said Lian Ping, chief economist with Bank of Communications.

The government will also cut inventories, de-leverage, reduce corporate costs and improve weak sectors in 2016.

In addition to reform measures, economists said regulators will continue to adopt pro-growth measures to reassure markets.

Julia Wang, HSBC Greater China economist, said both monetary and fiscal easing measures are needed to help support demand and anchor expectations.

The central government may raise the fiscal deficit target to 3 percent of GDP, from 2.3 percent in 2015, and use public-private-partnership cooperation, policy bank lending and local government debt swap program, Zhu said. Monetary policy will continue to be accommodative, with one rate cut and four cuts to the reserve requirement ratio.

But the economy still faces uncertainties, Lian said, citing the grim global economic outlook, impacts from U.S. rate hike, slowing industrial growth caused by overcapacity reduction and producer deflation, and flagging property investment.

A deeper and more prolonged property destocking process that may drag down industrial activity and investment appeared to be the top downside risk, Wang of the UBS said.

For the financial markets, investors worried that capital outflow may lead to tightening liquidity and sharp depreciation of the yuan, she said but added the probability is very low due to the government's effective regulation. Endi