China needs sup­ply-side re­forms to boost growth

The Pak Banker - - OPINION - Wu Zheyu

IN a re­cent in­ter­view with the China Daily web­site, Mar­git Mol­nar, head of the OECD's (Or­gan­i­sa­tion for Eco­nomic Co­op­er­a­tion and De­vel­op­ment) China Desk, de­scribed that China needs three things if it wants to main­tain growth - ex­pand­ing the scope of re­forms, a health­ier mar­ket­ing mech­a­nism, and en­cour­ag­ing its peo­ple to learn more about fi­nance. The rest of the in­ter­view is as fol­lows: CD: Why did the Chi­nese choose sup­ply-side re­forms now?

M?The Chi­nese econ­omy has grown fast for the past 20 years so there had been less pres­sure on the govern­ment to im­ple­ment struc­tural re­forms. Now, with the eco­nomic down­turn, the govern­ment can't rely on the old driv­ers such as cap­i­tal and la­bor in­put for eco­nomic growth, so there's more ur­gent need for sup­ply-side re­forms to boost the econ­omy's growth po­ten­tial. CD: The main pur­pose - as the pres­i­dent of the Asian In­fra­struc­ture In­vest­ment Bank, said at a news con­fer­ence in Bei­jing on Sun­day - of the re­forms is to re­duce over­pro­duc­tion and over­ca­pac­ity. Why do th­ese two things ex­ist?

M: For the past decades, the mar­ket role to al­lo­cate re­sources has not been ex­er­cised fully, which led to price dis­tor­tions. For ex­am­ple, in­ter­est rates didn't fully re­flect the price of cap­i­tal and many SOEs got cheap credit and other ben­e­fits through pref­er­en­tial poli­cies. It's com­mon knowl­edge, for in­stance, that China lacks en­ergy re­sources, nev­er­the­less it still be­came an ex­porter in en­ergy- in­ten­sive in­dus­tries such as steel or elec­trolytic alu­minum. The key here is that by keep­ing the price of en­ergy and cap­i­tal low, many firms be­came in­ter­na­tion­ally com­pet­i­tive in en­ergy-in­ten­sive goods.

CD: Cut­ting ex­cess in­ven­tory in the prop­erty mar­ket is also an im­por­tant goal this year. Some sug­gests en­cour­ag­ing mi­grant work­ers to buy prop­erty in 3rd-or-4th-tier cities. Could you give some sug­ges­tions on how to reach this goal? M: I heard a very rea­son­able pro­posal on en­cour­ag­ing re­tired mi­grant work­ers to buy prop­erty in th­ese cities be­cause mi­grant work­ers with sav­ings who would like to come back to a city near their home­town could en­joy still bet­ter ser­vices than in ru­ral ar­eas. This pro­posal also needs some sup­port mea­sures, like in­creas­ing the num­ber of nurs­ing homes and im­prove el­derly health care ser­vice in th­ese cities. China is ag­ing rapidly, even faster than Ja­pan and, among OECD coun­tries, only South Korea is ag­ing faster than China.

CD: Apart from cut­ting taxes, are there any other in­sti­tu­tional costs that can be low­ered to re­duce over­all costs of do­ing busi­ness? M: Struc­tural re­forms are much more im­por­tant than tax cuts, es­pe­cially those re­lated to set­ting up new firms. The SAIC ( State Ad­min­is­tra­tion for In­dus­try and Com­merce) be­gan com­bin­ing busi­ness li­censes, or­ga­ni­za­tion code cer­tifi­cates, and tax reg­is­tra­tion in one doc­u­ment, and that's a very pos­i­tive move. But there's still room for im­prove­ments when it comes to the man­age­ment process of en­ter­prise reg­is­tra­tion and en­ter­prise op­er­a­tions. And taxes are a very sen­si­tive is­sue, cut­ting taxes could also lead to a de­cline in fis­cal rev­enues, which means weak­en­ing the gov- ern­ment ca­pac­ity to pro­vide sup­port for those who need it. CD: How would sup­ply-side re­forms af­fect the eco­nomic struc­ture and the three main in­dus­tries?

M: The re­form process would speed up this year. Al­though the size of the ser­vice sec­tor now ex­ceeds that of in­dus­try, when com­pared with ad­vanced economies, there still ex­ists am­ple room for in­crease. Not only are the ser­vice in­dus­tries of the US and Bri­tain im­pres­sive, but also in other ad­vanced coun­tries the ser­vice sec­tor typ­i­cally ac­counts for around 70 per­cent of GDP, while in China, the ser­vice in­dus­try is still at 40 per­cent, so it's rea­son­able to ex­pect it to have a bright growth po­ten­tial. One rea­son for China's ser­vice in­dus­try's lag­ging be­hind man­u­fac­tur­ing is past pref­er­en­tial poli­cies for the man­u­fac­tur­ing in­dus­try. One re­cent mea­sure of con­vert­ing busi­ness taxes - levied on the turnover of ser­vices firms - into a value-added tax will en­cour­age ser­vices out­sourc­ing and very likely stim­u­late mi­cro-to-small busi­ness de­vel­op­ment.

CD: How long would it take to tie GDP growth to sup­ply- side re­forms? M: It's im­por­tant to avoid a hard-land­ing and to do that broad-scale struc­tural re­forms are in­dis­pens­able. Pop­u­la­tion ag­ing plays a key role in the slow­ing of long-term growth po­ten­tial. We be­lieve that struc­tural re­forms can make up for some of the slow­ing of po­ten­tial growth. At least it could di­min­ish the im­pact of slow­ing growth.

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