The past year may mark a turning point for China's economy, or merely a downturn after decades of higher growth rates.
In November, President Xi Jinping told leaders of the Asia-Pacific Economic Cooperation (APEC) summit that China's lower growth rates are now the "new normal," using a label he first applied to the decelerating economy in May.
"We must boost our confidence, adapt to the new normal condition based on the characteristics of China's economic growth in the current phase, and stay cool-minded," Xi said during a tour of central Henan province seven months ago.
Since then, economic activity has continued toward its third consecutive year of below 8-percent growth, posting an expansion of 7.3 percent in the third quarter after 7.7- percent increases in 2012 and 2013, the slowest annual pace since 1999.
Although much of the past year has been marked by expectations of a return to major stimulus policies, the government has largely stuck to its guns with smaller steps and targeted measures aimed at assuring more sustainable "medium-to-high" growth.
The leadership that took office in March 2013 has been grappling with the expansionary excesses of the previous government's 4-trillion yuan (U.S. $646-billion) stimulus package from 2008-2009, now blamed for a binge of construction, pollution, energy consumption, and debt.
The new government has been working from a reform blueprint laid out at the Communist Party Central Committee's Third Plenary Session in November 2013, seeking to end China's obsession with high gross domestic product (GDP).
While keeping the GDP target at 7.5 percent for 2014, Premier Li Keqiang announced a more flexible policy in March, tolerating somewhat lower rates as long as job growth and inflation stayed within a "reasonable" range.
"Whether the final reading is at a touch more or less than the 7.5-percent target is not that important. Employment is the key," Finance Minister Lou Jiwei said nine months ago.
But China's performance within the job and inflation parameters did little to assure markets that the government was dealing with deeper concerns over rising debt levels, weak industrial growth, stalled property sales, and lackluster trade.
"The downward pressure is still considerable. We should not ignore the challenges and risks," Premier Li told provincial governors in June, putting markets on watch for a loosening of the liquidity floodgates.
But it would be five months before the People's Bank of China (PBOC) responded with its first interest rate cut in over two years after smaller liquidity injections failed to spark the stagnating economy.
The drop in the one-year benchmark lending rate by 0.4 percent on Nov. 21 raised hopes that 2014 would close on a high note as markets jumped at the prospect of more rate cuts, faster home sales, and eased financing for debt-laden industries.
But hopes dimmed on Dec. 9 as stocks plunged 5.4 percent in the biggest dip since 2009, ending an 18-percent rise for the Shanghai Composite Index in the previous month.
Reports blamed a regulatory tightening on lower-grade securities that could be offered for municipal finance, but the sudden reversal suggested the rally was on thin ice as an economic indicator.
By last week, shares had recovered again as the Shanghai index reached a four-year high.
Yukon Huang, senior associate at the Carnegie Endowment for International Peace in Washington, said investors may be reading too much into the market's ups and downs.
"Some of that is unwarranted faith that the government can turn around economic activity through monetary easing. I think that portion of it is unrealistic," said Huang, a former World Bank country director for China.
A rocky year
At the close of its annual Central Economic Work Conference on Dec. 11, the government said it would largely stick with its recent policies, while acknowledging "something of a rocky year" and "relatively big" downward pressures, the official Xinhua news agency reported.
"I don't think the economy is going to improve significantly for at least a year or two," Huang said in an interview.
Even so, Huang argued in recent studies that some concerns with China's debt levels and other economic risks have been overstated.
Although debt has now climbed to an estimated 250 percent of GDP, Huang sees the legacy from the "big bang" stimulus as "serious but manageable" and unlikely to presage a crisis, in part because credit is fully funded by bank deposits.
In its official summary, the work conference said nothing about debt levels or credit risks, focusing instead on structural reforms to investment access, pricing and other Third Plenum goals.
"The proactive fiscal policy should be stronger and the prudent monetary policy should be more pragmatic," the conference said in one of its few hints of policy change.
Drop in growth
Huang said GDP growth may drop to 6-6.5 percent for the next two years as construction slows to reduce surplus housing, but China can snap back if it pursues the agenda of the Third Plenum reforms with some adjustments.
"China can sustain an annual growth rate of 7 percent in the second half of this decade if it puts into effect three major reform initiatives flagged at last year's Third Plenum: more efficient urbanization, realigned roles for the private and state sectors, and a better targeted regional development strategy," Huang said in a paper for China Economic Quarterly this month.
Huang said the government should reconsider its policy of restricting moves of rural dwellers to China's largest cities as it liberalizes its "hukou" household registration rules.
The urbanization program announced in March would open the doors for some 100 million migrants by 2020, but only for moves to second and third-tier cities, stopping short of giving citizens full freedom of movement.
By keeping population curbs on the "megacities" of Beijing, Shanghai, and Guangzhou, the plan would miss out on program's potential for bigger economic and efficiency gains, said Huang.
"That's where the productivity gains are. That's where the money is. That's where financially sustainable investments can be achieved," he said.
In another difference with the government's reform plan, Huang believes the push for "mixed ownership" to encourage private investment in state-owned enterprises (SOEs) is "unlikely to work."
"Essentially, it doesn't change the control structure," said Huang.
Instead, the state should just get out of some sectors altogether, although the process of transition to private enterprise may take years.
Dale Jorgenson, a Harvard University economics professor, said he remains encouraged by the agenda of the Third Plenum plans for structural reforms.
"I think that the Chinese economy is on track," said Jorgenson, who expects GDP growth next year of a "little less" than 7 percent.
Last week, a PBOC working paper forecast a 7.1-percent growth rate for 2015, down from 7.4 percent this year, according to Xinhua.
The right direction
Despite the recent lowering of interest rates, China's monetary policy remains tightly controlled. But regulators are "moving in the right direction" toward a more market-based system, said Jorgenson.
The central bank's recent plan to provide deposit insurance covering losses of up to 500,000 yuan (U.S. $81,500) is a "positive move," he said.
"The big ticket items are still ahead," said Jorgenson, pointing to urbanization and development of the private sector. "But at least, they're on the agenda," he added.
Changes in fiscal policy that would reduce the reliance of local governments on land sales by imposing property taxes are still expected to come only gradually.
On Monday, the State Council, or cabinet, announced a draft of new rules for real estate registration to take effect in March, marking a step toward financing through property taxes.
Resistance from SOEs
Privatization also remains a serious challenge for China, as the heavily-indebted SOEs have been slow to reduce industrial overcapacity and pollution.
"The SOEs are very eager to maintain control," said Jorgenson. "They are, by and large, a loss-making sector and they depend very heavily on being insulated from competition,' he said.
China's agenda has so far excluded a "big bang" privatization, similar to those in Eastern Europe and the former Soviet Union in the 1990s, which led to an explosion of free market activity but also sharp dislocations and long readjustment periods.
Instead, China has opted for gradual increases of private investment in SOEs, which could eventually make them market-driven.
The approach suggests years of structural adjustment that may exert a drag on economic growth, but China's alternatives for the politically powerful and bloated state sector are limited.
"You can't have privatization without a market for the securities of the state-owned enterprises," Jorgenson argued.
"It's going to be a very gradual process," he said.