Supply side structural reform for sustainable growth
The Fifth Plenary Session of the 19th Communist Party of China Central Committee that concluded last week advanced to combine the strategy to expand domestic consumption with the deepening of supply side structural reform, which the government has been carrying out since 2015.
Some overseas scholars have equated China’s supply side structural reform to former US president Ronald Reagan’s supply side reform, and a new planned economy. Suffice to say they have grossly misunderstood China’s reform policy.
After more than three decades of highspeed economic growth, the policy of stimulating the economy by simply increasing total demand has resulted in diminishing marginal utility. Likewise, the supply side’s growth dividend has been diminishing. With the completion of company system reform and the establishment of product market and factor market — particularly after the Chinese market integrated with the global market — China’s growth dividend has been declining.
Also, China’s production factor supply situation has drastically changed, leading to diminishing dividends of demography, high savings rate and foreign technology. This is the basic reason why China launched the supply side structural reform.
Since 2012, to cope with the economic slowdown after more than three decades of highspeed growth, the government, instead of simply following the old path of stimulating the economy through favorable monetary or fiscal policy, has been paying more attention to production factor supply, market supply pattern, and the product and service supply structure, as it wants to pursue longterm, sustainable and higherquality development by addressing these deepseated problems.
China’s supply side structural reform is guided by economic theories and practices based on the country’s economic development situation, rather than being restricted to one or two simple reform measures.
Which means different industries and regions have to adopt different reform measures in accordance with their respective situation.
In 2016, some regions failed to understand the true nature of supply side structural reform and implemented administrative measures to intervene in the overcapacity offloading process, which went against the original intention of supply side structural reform.
After the central authorities became aware of such problems, they asked the local authorities to take legal and marketoriented measures to offload overcapacity, allowing the supply side structural reform to play its due role.
The reform policies to reduce costs are also an important part of supply side structural reform. Since 2016, the central as well as local governments have been reducing taxes and fees, which have played a key role in reducing the cost burden of enterprises.
And to release the full potential of production factors by encouraging free population migration, the authorities have promoted permanent resident registration reform. In the financial and capital market, the authorities have advanced financial supply side structural reform through interest rate liberalization, in order to reduce enterprises’ actual financing cost. They have also promoted landuse rights and land transfer reforms in rural areas.
During the transition from a planned economy to a market economy, many problems were left unattended including administrative interventions and institutional restrictions. These restrictions are now impeding the supply of products, services and production factors. Therefore, the strategic aim of deepening supply side structural reform is to remove these restrictions so as to further liberate the production forces.
In terms of reducing administrative review, approval and control, the central government has made efforts to streamline the administration, delegate power to lowerlevel governments, improve regulations and upgrade services, as well as augment the business environment and commercial system. These reforms are aimed at improving the efficiency of both enterprises and government services.
China’s economy has reached a critical stage where cultivating new supply channels and eliminating ineffective and faulty supply channels, and upgrading the supply and consumption structures are the main problems to be addressed.
The central government has also launched a series of policies to support new products, new technologies and new business models, and encourage startups and innovation, which play key roles in propelling the formation and expansion of new supply channels.
In other words, China’s supply side structural reform is not the Chinese version of Reagan’s supply side reform, but a significant strategic reform to ensure sustainable growth by deepening overall reform and generating new dividends.