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Hu Yuwei: China should not rush blindly to supply-side reform


By Hu Yuwei     Source: Global Times     Published: 2015-12-14


China`s annual Central Economic Work Conference will offer indications of economic policy for the upcoming year. This year`s meeting is of particular significance because it is meant to summarize the progress during the 12th Five-Year Plan period (2011-15) and herald the beginning of the 13th Five-Year Plan period (2016-20). And during the meeting, supply-side structural reform will certainly be on the table.

Focusing on the supply side will be crucial for China`s future economic reform. It is expected that during the 13th Five-Year Plan period, China will set supply-side macroeconomic management as a core concept for a series of economic measures.

But when implementing these policies, several things should be taken into consideration.

First, a closer look at the relationship between demand and supply is needed. Supply-side reform can rectify the long-term macroeconomic management approach that only emphasized demand-side policies. But it would be a step too far if we were to conclude that demand-side economic policies are useless.

On the contrary, proper demand-side economic policies balanced with supply-side reforms will bring even more fruitful outcomes. For instance, it is true that a supply-side emphasis on products with more technological advancement would interest consumers and boost demand. But when matched with reforms on the demand side that could give consumers the economic strength to purchase the products, society`s total supply and total demand would meet at a higher and more effective level.

Second, we need to clarify the relationship between long-term reforms and short-term ones, as supply-side reform will be more focused on long-term and structural progress, while demand-side reform is more effective for short-term and cyclical objectives. It would be advisable to sacrifice certain short-term benefits for the sake of structural reform, but the risks will be greater if we blindly approach long-term goals without giving due regard to current social stability.

Due to China`s long-standing demand-oriented macro policies, industry structure and employment structure have become rather rigid. But reforms should avoid breaking the old and establishing the new overnight.

As supply-side structural reform is heatedly discussed nationwide, we shouldn`t expect that the overcapacity accumulated over a decade will be absorbed in a short period of time, and it is not advisable to simply suspend or shut down resource-hungry and polluting industrial enterprises. Doing so would lead to massive unemployment and store up trouble for social stability.

Hence, we should carry out structural reform on the condition that it doesn`t carry the risk of economic volatility and unemployment.

Third, the relationship between the issuance and implementation of policies should be dealt with. To a certain degree, the latter might be of greater importance. The notion of supply-side reform has pointed out a clear direction toward future reforms, but working out how to implement them is the crucial question, and a challenging one.

Supply-side reform measures such as structural tax cuts, reduction of overcapacity, and lowering of financing costs for private enterprise have already been outlined in the 13th Five-Year Plan and other economic reforms. But so far they haven`t proved effective. This is partly because they have run contrary to the interests of various industries and departments. The reforms will only be successful when they are well understood and supported and implemented.

Fourth, regarding domestic overcapacity, we should be aware of the relationship between domestic and overseas markets. It will take time to deal with domestic overcapacity, but the government could take advantage of overseas markets to absorb some of this overcapacity and enable industrial upgrading as fast as possible.

One solution is to seek aid from China`s "One Belt, One Road" initiative. China could divert excess capacity in the cement, steel, and chemical sectors to neighboring countries who are in urgent need of such high-quality capacity and who have inadequate infrastructure that drags on their local economic development.

But only high-quality capacity should be transferred, and international standards and local laws and policies must be observed, in order to establish a good image for China`s overseas investment.

The author is a research fellow at the Chongyang Institute for Financial Studies, Renmin University of China.

Key Words: reform   economy   supply-side   

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