Chinese Economy Embraces Supply-side Reform

By staff reporter ZHOU LIN

CYBER retailers geared up at midnight heralding the dawn of November 11， 2015 to collectively raise the curtain on the Double Eleven Festival – Chinas most proactively participated-in shopping spree.

On this day the countrys turnover hit a historic global high of RMB 91.2 billion， and 68 percent of transactions， covering 232 countries and regions around the world， were made by cellphone.

During Spring Festival 2015， news reports of Chinese tourists in Japan snapping up ostensibly local-made toilet seats by the thousand triggered hot online comments. Certain models of these much-sought-after bathroom accessories， however， were eventually found to have been manufactured in the coastal province of Zhejiang in eastern China.

This begs the question， why should so many Chinese travelers in this neighboring country fall prey to a wave of panic purchasing of China-made merchandise？ Chinese Premier Li Keqiang addressed this paradox during the NPC& CPPCC sessions last year.

Lis sagacious answer was： first of all， we should be open-minded enough to oppose any trade barriers， because consumers have the right to make their own choices； second， Chinese enterprises should upgrade their technologies sufficiently to produce commodities that are equally competitive. “We should at least save our Chinese customers the expense of an air ticket，” was Lis jocular conclusion.

It is clear that Chinese customers lack neither shopping zeal nor wherewithal. However， the sometimes unsat-isfactory quality and exorbitant prices of high-end products on the domestic market periodically provoke panic shopping overseas. Making dramatic tariff cuts on certain imported goods and enhancing the quality of domestically produced commodities will undoubtedly unleash Chinas huge consumption potential.

By rallying retailers for en masse promotions， Double Eleven day upgraded a national phenomenon to a global consumers Black Friday. This has also wrought huge changes on Chinas economy.

Ineffective Demand Stimulus

The Chinese government insisted during the 12th Five-Year Plan （2011-2015） period on an economic development strategy of enlarging domestic demand. To some extent this move inhibited the economic slowdown， but economic growth nevertheless dramatically declined.

The focus of Chinas economy since the 2008 global economic crisis has been a moderately eased financial and monetary policy that stimulates investment and consumption. This method has at times been effective in curbing economic decline. For instance， the Chinese governments 2010 RMB 4 trillion （US $620 billion） stimulus package enabled the economy to rebound and achieve that year double-digit growth of 10.6 percent. Two years later， however， the Chinese economy slid to a growth rate of less than eight percent， and by the third quarter of 2015 to one of less than seven percent.

Experience has shown that investment alone cannot achieve a return to high growth， because the prospects for its two main arms – real estate and manufacturing – are bleak. In view of the polarized domestic real estate market， several metropolises， including Beijing and Shanghai， are still hoping for higher house prices. Most third- and fourth-tier cities with high housing inventories， meanwhile， are under considerable pressure to reduce their numbers of unsold homes. The manufacturing sector is moreover undergoing the inevitable stress of superfluous capacity elimination.

A slow global economic recovery， along with the waning cost advantage of Chinese manufacturing， has in recent years caused a reverse in the countrys import and export trend from acceleration to deterioration. Imports and exports in the first three quarters of 2015 shrank by 7.9 percent， year-on-year. Projections imply that global economic entities， other than in the U.S. where it is advancing at a sound momentum， will take some considerable time. The outlook for most developed countries， particularly Japan and those in the EU， as well as certain emerging economic entities， is not optimistic in this respect. Foreign demand， therefore， is unlikely to provide the impetus Chinas economy needs. Another challenge is the new TPP global trade rules， dominated and led by the U.S.， which signify that any bonuses the Chinese economy might have reaped from the WTO are gone forever.

Consumption is another potential engine the Chinese government has used to stimulate the economy. The real effect of Chinas economic transformation towards a consumption-oriented market， however， is not yet obvious. There is still a long way to go before the country reaches the ideal 70 percent rate of consumption contribution to the economy of developed countries. In 2014， the share of final consumption expenditure in Chinas GDP growth was 51 percent. However， according to the latest statistics released by Chinas MOFCOM， the figure reached 66.4 percent in 2015， a 15.4 percentage growth over the previous year. China thus made the successful transition from depending on investment and export to relying on domestic demand， especially consumption， to boost its economy.

Supply-side Reform

The debut of supply-side reform was a main feature of the first year of the 13th Five-Year Plan （2016-2020） period.

The term has indeed become a buzzword among top leaders since November 2015， especially after President Xi Jinpings keynote speeches at the 11th meeting of the Leading Group for Financial and Economic Affairs and the 2015 APEC CEO Summit， when he emphasized the importance of supply-side structural reform. Premier Li Keqiang stated at the planning meeting of the 13th Five-Year Plan， “Efforts should be made from both the supply-and demand-sides to promote the industrys development towards medium and high end.

“Supply-side structural reform is a major innovation through which the country may adapt to and maneuver the economic ‘new normal. It is also Chinas conscious choice to respond to a new comprehensive national power competition after the global financial crisis，”the latest Central Economic Work Conference concluded. It declared， “In the coming years， in addition to moderate enlargement of total demand， we should also strengthen supply-side structural reform.” The year 2016 was thus earmarked as crucial to reform.

“Recognizing， adapting to， and leading the new normal” is and will be the development logic of Chinas economy， and supply-side reform has been described as a major innovation in this regard.

As an economic term， supply-side is the antithesis of demand-side.

On the side of demand are investment， consumption， and export， which determine the short-term economic growth rate. On the side of supply， four main elements – labor force， land， capital， and innovation – can generate medium- and long-term potential economic growth in an optimal allocation circumstance. The newly proposed supply-side structural reform aims at readjusting the economic structure to optimize allocation of production elements， thus to improve the quality and quantity of economic growth.

According to Keynesianism， economic recession is mainly the result of low de- mand. The best course， therefore， is to stimulate demand and adopt active fiscal and monetary policies to counteract the crisis.

The supply school of thought holds that supply， rather than depending on large-scale stimulus policies， spontaneously creates demand. Enhancement of productivity to achieve a higher production level is the main means of boosting economic growth. More efficient supply， therefore， requires promotion of potential production， thus promoting economic growth.

High Expectations

On the one hand we have downward economic pressure； on the other， blowout consumption demand； on the one hand we have severe overcapacity of traditional industry； on the other， burgeoning emerging industry and high-end manufacturing； on the one hand we have low efficiency of certain government agencies and institutions； on the other， unsatisfied demands of the people as regards public administration and service industry.

It has been proved that demand-side economy has been over-explored， and that if the government hopes to solve the current problem it must coordinate both the supply- and demand-side. Only then can an effective supply capability be promoted， so creating new supplies， enhancing production quality， enlarging consumption demand， and promoting economic growth.

How can this reform be put into practice？ Four key measures must be considered. They include resolving superfluous capacity， reducing the costs of enterprises， dissolving estate inventory， and preventing financial risks. To be successful in these areas， supply-side reform must be pushed forward on four fronts – labor force， capital， innovation， and government.

One factor that has considerable influence on the total supply level is that of the economys production investment and ratio of combo investment， encompassing the countrys level of technology and management efficiency. Production investment compromises human resources and capital investment. Relaxing the family planning policy is a significant measure by the Chinese government to handle the pressure generated by the disappearance of Chinas demographic dividend.

In addition to these measures， supply-side reform aims at promoting the Chinese economys productivity – a crucial test of economic reform. Indeed， the reform and opening-up policy adopted last century demonstrates the benefits of liberating a huge productive force.

How can total factor productivity be promoted？ First， we should establish a system of incentives that inspires innovative aspirations， and that also relies on development of the capital market and direct financing. Second， we should create a more relaxed environment that facilitates commercialization of innovative products through integration and collaboration of manufacturing and teaching and researching resources，and by providing capital access and tax incentives.

Supply-side reform holds that an excessively high tax rate not only reduces government revenues but also exerts huge negative impact on economic activities. It is clear that by imposing an excessively high tax rate， the government expropriates enterprises and individualsrevenues. The rational choice， therefore， is to automatically reduce economic activities， so bringing about reduction of the tax base as well as of government revenues. On the contrary， tax reductions may proactively inspire economic activities， so increasing economic output and government revenue.

The government should bring supplyside reform into effect in two ways： first by reducing the institutional cost of economic activities， including anti-corruption， monopoly breaking， streamlining administration， and delegating power； and second， by providing a driving force for the economy through the stateowned enterprise reforms of consolidation and regrouping.

At the beginning of the 13th FiveYear Plan period， the Chinese economy will transform potential into motivation， thus generating new vitality in the process of carrying out supply-side structural reform.