Emerging industries

This year emerging industries will receive substantial support and specific policies will be issued soon. Out of 30 securities companies that have issued investment strategies for this year, 11 have made it clear that emerging industries will be their key investment focus.

Last October, the State Council announced the decision to accelerate the cultivation and development of strategic emerging industries. These industries include: energy saving and environmental protection, new generation of information technology, biology, high-end equipment manufacturing, new energy, new material and new energy vehicles.

The government will provide favorable fiscal and tax policies to support the growth of these industries. The government also sets goals for the new industries: Output of these industries would amount to 8 percent of the country's GDP by 2015 and 15 percent by 2020.

Income distribution

Reform of income distribution has always been a focus of attention. This year, the reform will continue in three aspects—personal income tax, wage levels, and dividends of state-owned enterprises.

During the past decade, income distribution has inclined toward the government rather than the people, and that's why our domestic consumption remains gloomy, said Xu Xiaonian, an economics professor at the China Europe International Business School (CEIBS). Reforming the nation's income distribution system is urgently needed to encourage consumption, Xu said.

As an important instrument for adjusting income distribution, the personal income tax system will probably be changed this year. Yang Yiyong, Director of the Research Institute for Social Development under the National Development and Reform Commission, suggests gradually raising the personal income tax exemption limit and levying the personal income tax on a family basis.

It has been reported that the government finished drafting the amendments to the Personal Income Tax Law last November.

In addition to tax cuts, another viable way to make income distribution more fair is to increase wage levels for low-to-middle-income groups. Since the middle of last year, more than 10 provinces, municipalities and autonomous regions have raised their minimum wage by more than 10 percent.

The country will also increase dividend payments paid by state-owned enterprises to the government this year, which is a step toward bridging the income gap between different industries.

Bond market

In recent years, China's bond market has been developing rapidly. Compared with advanced countries, however, it is small in scale. According to Zhang Chun, a professor with CEIBS, the U.S. bond market is more than one time its GDP, whereas China's bond market is only 8 percent of its GDP.

Shen Liantao, chief consultant with the China Banking Regulatory Commission, said too many supervisors have made it difficult for China's bond market to develop.

Currently, although corporate bonds can be issued in the Shanghai and Shenzhen stock markets, most domestic corporate bonds are issued through the interbank bond market. When banks become the major traders of corporate bonds, these bonds are similar to bank loans. But at the same time, the stock exchanges lack liquidity in their bond markets.

The government is committed to improving corporate bond market access, the bond issuance approval process, and credit rating and investor services systems; and effectively expanding corporate bond financing.

Stock market

Monetary policy will be one of the major factors affecting stock markets this year. According to a report by Shanghai-based Shenyin and Wanguo Securities Co. Ltd., people have high expectations for inflation and only repeated interest rate increases could decrease mounting inflation pressures. Shenyin and Wanguo Securities estimated this year the benchmark interest rate may increase by 75 percentage points. Although interest rate hikes may be bad news for stock markets, the A-share market may still remain strong since expectation that interest rates will increase is widespread among all types of investors.

In addition, housing market regulations will also exert influence on stock markets. According to Inner Mongolia-based Rising Securities, real estate stocks will not recover the high valuation they had in the past. In this sense, they will not be able to drive the whole stock market up.

Valuations of blue-chip stocks such as those in financial services, mining and construction are at historically low levels. They will see valuation rises this year, according to Beijing-based Minsheng Securities.

Energy prices

Over the next five years, the acceleration of urbanization, energy conservation, emission reductions and economic restructuring will surely drive up the demand for coal, power, steel, cement, copper and other resources, said Wang Shuangzheng, an analyst with the Price Monitoring Center under the National Development and Reform Commission.

Prices of coal, power, oil and their freight will see a marked trend up this year and even jump in certain periods, said Wang.

In an effort to alleviate dependence on fossil energy sources, China will vigorously develop some renewable energies, including wind power and photovoltaic power over the next five years, which will surely push power prices up. Jiang Liping, Deputy Director of the State Grid Energy Research Institute, noted that development of wind power will boost operating costs for the power grid, thus further pushing up electricity prices in China.

Banking sector

The banking sector will grow more steadily this year after years of robust growth. Along with the steady economic growth and new supervisory measures, banks will slow their pace in lending. Housing market regulation and potential risks hidden in local government financing vehicles will affect banks' profits.

Bank of Communications estimates profit growth of the banking sector will drop to 15-20 percent. New loans will be 7 trillion yuan ($1.06 trillion) to 7.5 trillion yuan ($1.15 trillion). Direct financing will see rapid increases this year. Social financing will not exceed last year's scale of 12 trillion yuan ($1.85 trillion).