Slower growth, faster reform, more policy easing

Given downward pressures on and structural problems in the economy, Premier Li's government work report lowered key economic objectives from last year's levels. As was widely expected, China's target for real GDP growth was lowered from around 7.5 percent in 2014 to around 7 percent this year; targets for this year's retail sales and fixed asset investment growth were lowered too.

Slower growth does not pose a big challenge for China's labor market. We estimate that a 6.5-7 percent GDP growth rate this year would be sufficient to generate over 10 million new urban jobs. Indeed, the government has kept the urban employment target for this year at more than 10 million.

Meanwhile, the government's goal to keep CPI inflation at around 3 percent to us seems overly ambitious, given still rising deflationary pressures and declining commodity and energy prices, even after taking into account anticipated price reforms.

Setting 2015's GDP growth target at around 7 percent is an important signal, designed to better manage expectations.

On the one hand, a lower target means that the government is tolerating slower growth. On the other hand, the target's still high level signals the government's intent to provide policy support as needed to prevent an excessive deceleration of growth.

Premier Li highlighted two "new engines" of growth: increasing public goods and services provisions, and mass entrepreneurships. For the former, the government will not only increase spending but also invite corporate sector participation; for the latter, the main role for the government will be to provide a conducive environment and lower entry barriers.

We think a 7 percent GDP growth will be difficult to achieve this year amid a structural property downshift, notwithstanding further expected macro policy easing. In addition to a larger fiscal deficit and further monetary easing, we expect the government to ease property policies and further promote infrastructure investment by "crowding in" the use of corporate balance sheets.

Nevertheless, we maintain our GDP growth forecast of 6.8 percent, as we believe such easing measures will not be sufficient to fully offset the negative impact of China's ongoing property construction downshift.

UBS economists Harrison Hu, Ning Zhang, Donna Kwok and Jennifer Zhong contributed to this article.

The author is a UBS economist. The views do not necessarily reflect those of China Daily.