En­ter­prises lined up for sup­ply-side at­ten­tion

Lat­est catch phrase has caught the world’s at­ten­tion but it does not equate to Reaganomics or Thatcherism, ex­perts say, re­ports.

China Daily (Canada) - - ANALYSIS -

One of the most cur­rent fash­ion­able terms in China — now even re­peated by or­di­nary peo­ple on the street — is sup­ply-side re­form. It was cer­tainly a high pri­or­ity in the 13th Five-Year Plan (2016-20), which will set the course of gov­ern­ment pol­icy up to the end of the decade. The gov­ern­ment’s adop­tion of a con­cept as­so­ci­ated in the 1980s with the free mar­ket eco­nom­ics of pres­i­dent Ron­ald Rea­gan, dubbed Reaganomics, and Bri­tish prime min­is­ter Mar­garet Thatcher, has at­tracted world­wide at­ten­tion in­clud­ing The Econ­o­mist and The New York Times.

The term sup­ply-side, or gong ji ce, was first used by Pres­i­dent Xi Jin­ping in key­note speeches last year.

At the re­cent two ses­sions of the Na­tional Peo­ple’s Congress, the coun­try’s top law­mak­ing body, and the Na­tional Com­mit­tee of the Chi­nese Peo­ple’s Po­lit­i­cal Con­sul­ta­tive Con­fer­ence, the coun­try’s top po­lit­i­cal ad­vi­sory body, some of the pol­icy de­tail was fleshed out.

A cen­tral plank of China’s sup­ply-side eco­nomic pro­gram will be re­form of 150,000 State-owned en­ter­prises and, in par­tic­u­lar, get­ting rid of so-called zom­bie cor­po­ra­tions, the worst per­form­ing of all.

One of the prob­lems of the Chi­nese econ­omy is that too many la­bor and cap­i­tal re­sources are tied-up in these en­ter­prises, which are of­ten in key strate­gic in­dus­tries.

Since the turn of the cen­tury they have been grow­ing at a third of the rate of the pri­vate sec­tor, which now boasts world beat­ing com­pa­nies such as the telecom­mu­ni­ca­tions group Huawei and the ecom­merce giants Alibaba and Ten­cent.

Ac­cord­ing to Gavekal Drago­nomics, an eco­nomic re­search com­pany in Bei­jing, they had a re­turn on as­sets in 2014 of 4.6 per­cent, more than half of the 9.1 per­cent of the pri­vate sec­tor. Their per­for­mance is, in ef­fect, a drag on the econ­omy’s abil­ity to sup­ply goods and ser­vices.

An­other ma­jor area of sup­ply-side re­form will be re­form of the hukou, or house­hold reg­is­tra­tion sys­tem.

The gov­ern­ment wants to make it eas­ier for mi­grant work­ers to move with their fam­i­lies to cities and lead more sta­ble lives in ur­ban ar­eas.

This, over the longer term, will lead to greater flex­i­bil­ity of the la­bor mar­ket, re­sult­ing in many work­ers be­ing in bet­ter-paid em­ploy­ment with the ef­fect of also boost­ing con­sump­tion. An­other aim of the gov­ern­ment is to pro­mote in­no­va­tion through a va­ri­ety of ini­tia­tives, to up­grade the econ­omy so that the goods and ser­vices sup­plied will be de­manded by an in­creas­ingly af­flu­ent mid­dle class so­ci­ety.

These sup­ply-side re­forms should, taken to­gether, ac­cord­ing to the gov­ern­ment, achieve the shift the econ­omy needs to make from an ex­port and low-cost man­u­fac­tur­ing driven econ­omy to one that is more built on ser­vices and con­sump­tion.

Xu Bin, pro­fes­sor of eco­nom­ics and finance at China Europe In­ter­na­tional Busi­ness School in Shang­hai, be­lieves adopt­ing a sup­ply-side ap­proach is the only vi­able op­tion now avail­able.

“I think this is a crit­i­cal point for Chi­nese pol­icy over­all. We have seen the ex­port sec­tor ex­pe­ri­enc­ing neg­a­tive growth (ex­ports fell 25 per­cent year-on-year in Fe­bru­ary), man­u­fac­tur­ing is very bad right now and in­vest­ment has reached a bot­tle­neck,” he said.

Xu added that there is noth­ing nec­es­sar­ily mys­te­ri­ous or com­plex about the con­cept of such re­forms.

“The key word re­ally is ef­fi­ciency. You want to do what­ever is likely to in­crease the ef­fi­ciency of the pro­duc­tion process. It can in­clude a lot of ar­eas, in­clud­ing in­no­va­tion and tech­no­log­i­cal progress, higher qual­ity man­age­ment and in­creased lev­els of ed­u­ca­tion, which im­proves the pro­duc­tiv­ity of the work­force.”

One of the crit­i­cisms in China has been that the term sup­ply-side has been de­ployed as a catch-all term to de­scribe a whole se­ries of oth­er­wise dis­jointed poli­cies.

Zhu Ning, deputy dean of the Shang­hai Ad­vanced In­sti­tute of Finance, be­lieves there is def­i­nitely a risk of this. “I am los­ing track slightly. If you take a step back, many of these pro­posed pol­icy re­forms such as of State-owned en­ter­prises and the la­bor mar­ket have been brought up much ear­lier with­out hav­ing the la­bel of sup­ply-side at­tached,” he said.

The use of the term sup­ply-side has brought up the par­al­lels with the Reaganomics of the 1980s, which along with Thatcherism in Bri­tain, fun­da­men­tally al­tered the course of post-war eco­nomic pol­icy in the West.

Out went the Key­ne­sian poli­cies that had largely con­sisted of fis­cal pol­icy to con­trol the level of ag­gre­gate de­mand in the econ­omy with the aim of main­tain­ing full em­ploy­ment but had re­sulted in stagfla­tion (low growth and in­fla­tion), and in came free-mar­ket poli­cies em­brac­ing Chicago school mon­e­tarism that had orig­i­nated in the 1950s but had be­come par­tic­u­larly prom­i­nent in the 1970s.

A key el­e­ment of this in the United States was tax cuts and dereg­u­la­tion, and a land­mark event was Rea­gan’s 1981 Bud­get, in which he re­duced the mar­ginal tax rate for high earn­ers from 70 per­cent to 50 per­cent.

Paul Craig Roberts, who was as­sis­tant sec­re­tary in the US Trea­sury at the time and who has given an ad­dress to Chi­nese lead­ers on sup­ply­side eco­nom­ics in Bei­jing, be­lieves there are par­al­lels be­tween what hap­pened in the US then and the chal­lenges fac­ing China now.

“Sup­ply-side eco­nom­ics en­tered the scene (in the US), be­cause the Key­ne­sian pol­i­cy­mak­ers had no an­swer to the wors­en­ing trade­offs be­tween in­fla­tion and un­em­ploy­ment,” he said. “In short, to com­bat in­fla­tion within the de­mand man­age­ment model was re­quir­ing higher rates of un­em­ploy­ment, and to boost em­ploy­ment was re­quir­ing higher rates of in­fla­tion.”

Roberts, au­thor of The Sup­ply Side Rev­o­lu­tion: An In­sider’s Ac­count of Pol­i­cy­mak­ing in Wash­ing­ton and who has had his books trans­lated into Chi­nese, said that what China is try­ing to deal with is not stagfla­tion but high debt.

He said lead­ing Chi­nese thinkers in this area such as Jia Kang, pres­i­dent of the China Academy of New Sup­ply-side Eco­nom­ics, the lead­ing think tank, re­al­ize they have to change the eco­nomic model, which has re­lied on boost­ing con­sump­tion and in­vest­ment with cheap money.

“In other words, an ex­tra­or­di­nary amount of in­come is di­verted away from the de­mand for goods and ser­vices and from real busi­ness in­vest­ment (as op­posed to in­vest­ment in fi­nan­cial in­stru­ments). The fi­nan­cial em­pires built by debt finance are drain­ing the Chi­nese econ­omy of the abil­ity to grow,” he said.

For­eign multi­na­tion­als in China have wel­comed China’s sup­ply re­forms be­cause they be­lieve an up­grad­ing of the econ­omy will ben­e­fit their busi­nesses.

Gaby-Luise Wuest, manag­ing di­rec­tor of In­finiti China, the lux­ury divi­sion of Ja­panese car­maker Nis­san, be­lieves it will be good for the premium car mar­ket in the longer term. “Sup­ply-side re­form re­quires com­pa­nies to fo­cus more on in­no­va­tion, and there­fore pro­vide op­por­tu­ni­ties for in­no­va­tive man­u­fac­tur­ers,” she said.

Zhang Ying, manag­ing di­rec­tor for Greater China for Das­sault Sys­temes, the French multi­na­tional soft­ware com­pany, thinks such an ap­proach will drive the devel­op­ment of tech­nolo­gies such as cloud com­put­ing, big data, the In­ter­net of Things and 3-D print­ing. “As far as I am con­cerned, sup­ply-side struc­tural re­form will lever­age all ef­fec­tive ways to im­prove busi­ness pro­cesses, rang­ing from re­search and devel­op­ment to sales and mar­ket­ing.”

Huang Chen­hong, pres­i­dent, Dell Greater China, be­lieves that if sup­ply­side re­forms are suc­cess­ful, it will cre­ate a bet­ter busi­ness en­vi­ron­ment in which to op­er­ate.

“Sup­ply- side re­form, which en­cour­ages tax cuts, en­trepreneur­ship and dereg­u­la­tion will in­crease tech­no­log­i­cal rev­o­lu­tion and high­qual­ity goods and ser­vices,” he said.

Zhu, also au­thor of the re­cently pub­lished China’s Guar­an­teed Bub­ble, which looks at some of the risks within the Chi­nese econ­omy, be­lieves China’s weak­ness is not on the sup­ply side but on the de­mand side of the econ­omy and this is what the gov­ern­ment should deal with.

He said the prob­lem in both the US and the UK 30 years ago was very dif­fer­ent from what it is in China today. “In both cases the de­mand side was strong enough but there wasn’t enough in­cen­tive for com­pa­nies to pro­duce what the de­mand side de­sired. If sup­ply lagged be­hind de­mand you had a con­tin­ual risk of in­fla­tion.”

How­ever, Xu at CEIBS in­sists that China is not blindly fol­low­ing some old model of sup­ply-side re­form and is also aware of some of the fail­ings of Reaganomics and Thatcherism that even­tu­ally led to in­creas­ing in­come in­equal­ity.

“I think they want to learn from the West­ern sup­ply-side poli­cies and gen­er­ate some spirit of in­creas­ing ef­fi­ciency by free­ing the pri­vate sec­tor but not to the de­gree that is go­ing to neg­a­tively af­fect the work­ing class,” he said. “China wants to raise ef­fi­ciency while ac­tu­ally re­duc­ing the in­come in­equal­ity gap.”

The key word (of sup­ply-side re­form) re­ally is ef­fi­ciency. You want to do what­ever is likely to in­crease the ef­fi­ciency of the pro­duc­tion process.”

pro­fes­sor of eco­nom­ics and finance at China Europe In­ter­na­tional Busi­ness School

Con­tact the writer at an­drew­moody@chi­nadaily.com.cn

PHOTOS PRO­VIDED TO CHINA DAILY

An em­ployee works at a State-owned tex­tile plant in Huai’an, Jiangsu prov­ince. The re­form of China’s State-owned en­ter­prises and get­ting rid of so-called zom­bie cor­po­ra­tions is a cen­tral plank of the sup­ply-side eco­nomic pro­gram.

Alibaba Group an­nounced on March 21 that its to­tal trad­ing vol­ume in the cur­rent fis­cal year ex­ceed­ing 3 tril­lion yuan ($463.3 bil­lion). Pri­vate sec­tor which boasts com­pa­nies such as Alibaba, en­joy growth than State-owned en­ter­prises.

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