China Adapts To 'New Normal'

China is going through a painful period of adjustment, economists say.



Speaking to parliament Thursday, Premier Li Keqiang signaled that the lowest rate of growth in a quarter of a century is the "new normal" for the country.



Li forecast growth of 7 percent this year, after 7.5 percent 2014, but economists say real growth is much lower.



"On our numbers, quarterly annualized real GDP growth averaged just 4.6 percent in 2014, a far cry from the norm of 13 percent plus before the crisis," warns Diana Choyleva, an economist with Lombard Street Research in London.



Li said priorities included pushing ahead with reforms of the giant state-owned enterprises and liberalizing the banking system and financial markets.



But analysts called this a difficult challenge.



"China's growth slump amid record-high capital outflows poses a stern challenge for China's leaders," Choyleva said. "The investment correction that the economy needs to go through has only just begun, while the reforms necessary to rebalance growth are far from easy." 



"We expect China to join the currency wars with a moderate yuan depreciation against the dollar. The likelihood of a sharp 10 percent to 15 percent devaluation is not insignificant, but this is not our central case. While the real economy desperately needs a weaker currency, a yuan devaluation risks destabilizing financial markets," she added.



The People's Bank of China recently cut interest rates for the second time in three months, in an effort to reduce the value of the yuan, and to free up credit flows.



Beijing also plans to lift government spending to 17.15 trillion yuan ($2.74 trillion) in 2015, an increase of 10.6 percent from 2014.



That will mean raising the budget deficit to 1.62 trillion yuan, or around 2.3 percent of GDP, up from 2.1 percent in the previous year.



All of this is part of an effort to create more than 10 million jobs, Li said.



But analysts pointed to saturation in Chinese infrastructure investment, which is where the government plans to intervene.



"China has massively over-invested in infrastructure," pointed out Olga Bitel, an economist with William Blair, in a report published in December 2014. "The ongoing slowdown in residential real estate construction is applying downward pressure on Chinese imports." 



Bitel added that she wondered if the significant reforms, as proposed by Li, would be possible.



"Certainly this is a highly complex reform process that will take several years," Olga said.



"In order to defuse problems and risks, avoid falling into the 'middle income trap', and achieve modernization, China must rely on development, and development requires an appropriate growth rate," Li said. 



But economists doubted the sustainability of growth at the level Li called for.



UBS economist Wang Tao doubted that there would be substantial recovery in any sector of the economy for some time. 



The country will also face strong deflationary pressure, he said during a recent lecture in Shanghai.



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