A guide for Supply-side Reform
achievements in supply-side structural reform - cutting excess capacity, destocking, deleveraging, lowering corporate costs and improving weak links. However, there are still severe challenges remaining. The work of cutting excessive production capacity in steel and coal industries was uneven in 2016, and some shutdown production centers covertly resumed work after product prices soared.
Deleveraging in the real estate market achieved remarkable results, with more than 80 percent of unsold houses in Beijing, Shanghai and Guangzhou being sold. Nonetheless, housing prices in some first and second-tier cities rose rapidly while third and fourth-tier cities still had a large housing inventory. Furthermore, the cost of corporate financing, logistics, energy, land use and transactions is still not low enough to support the transformation and upgrading of the manufacturing industry. Finally, working capital is not adequate in many sectors of the economy’s so-called “weak links,” meaning coordinated and high-quality economic growth is stymied.
To address these problems, attention must be paid to the following issues when continuing supply-side structural reforms this year.
Correct understanding Supply-side structural reform is a term that must be well understood. Some people mistake “cutting excess capacity” as “cutting output.” Government orders to cut excess capacity could be meaningless under certain circumstances. When prices rise because of drops in output, industries will naturally put their shut-down production capacity into operation again.
For instance, cutting excess capacity in the steel and coal sectors in 2016 had mixed results mainly because steel and coal prices kept rising since the third quarter of the year. In major steelproducing provinces such as Hebei, Jiangsu and Shandong, output of crude steel increased rapidly amid price surges while in Shaanxi, Xinjiang, Inner Mongolia and Shanxi, China’s major coal producers, coal output also grew.
The government should instead formulate standards concerning energy and resource consumption, pollution, and workplace safety. It should also ensure that everyone adheres to the same standards, order the termination of firms which fail to obey the standards and let the market play its role.
It is hard to demonstrate fairness