Supply-side reforms the new normal in China

China is shifting focus towards the supply side to inject vitality into its slowing economy and sustain growth, as the effectiveness of traditional demand side policy support wanes.

Top leaders agreed at the annual Central Economic World Conference that the country will take steps to expand aggregate demand while pushing forward a supply-side structural reform in the next year and beyond through new demand and productivity, Xinhua news agency said in a commentary.

China spent decades stimulating the demand side, including investment, consumption and exports to support growth. “However, the effectiveness of such a strategy has lessened,” it said.

The economy experienced acute volatility in the mainland equity market, poor economic indicators and a devaluation of the yuan, forcing the government to take strong steps such as cutting interest rates five times and pumping massive investments into infrastructure to spur the slowing economy. But it wasn’t enough.

“That’s because it [the demand-side support policy] is no longer the remedy for the disease,” Xinhua quoted Li Zuojun, a researcher with the State Council Development Centre (DRC), a government think tank, as saying.

China’s growth slowed to 6.9 percent in the third quarters, the weakest pace since the global financial crisis, and is widely expected to post its lowest rate in a quarter of a century this year.

The central government started to stress “supply-side reform” several weeks ago, a turning point in macro-policy. It has been repeatedly mentioned by President Xi Jinping and Premier Li Keqiang.

This also comes as China steers toward a growth model based on domestic demand, innovation and the private sector instead of trade and credit expansion.

Supply-side reform will be a stepping stone for China to achieve its structural reforms during the 13th Five-year Plan period (2016-2020), Xinhua quoted Wang Xiaoguang of the China Academy of Governance as saying.

However, Zhao Yang of Nomura, thinks supply-side reform, which will increase long-term growth potential, is unlikely to offset strong headwinds in the short term.

China has vowed to “add new supply, create new consumption and form new growth momentum” through new ideas  in institutions, technology and products.

The centerpiece of supply-side reform will be to remove regulatory barriers and give the market a bigger say in resources allocation, Wang Xiaoguang said.

According to a statement after the four-day meeting, supply-side reform will include more tax cuts, lowering corporate borrowing costs, incentives for specific industries, tackling factory overcapacity and property inventories and easing administrative restrictions.

To be more specific, the current proactive fiscal policy needs to be more forceful by cutting taxes and raising the fiscal deficit ratio gradually. Prudent monetary policy needs to be more flexible to create the monetary conditions for structural reform and lower costs, it said.

Nomura expects two 25-basis-point interest cuts in 2016 and projects that China’s fiscal deficit will widen to 3 percent of GDP from an estimated 2.8 percent this year.

The government will offer more support for companies to upgrade technology and equipment and reduce debt, and will foster emerging sectors and encourage innovation in technology, products and business models.

In eliminating overcapacity, China will create conditions for bankruptcy procedures based on market rules, and speed up liquidation cases.

 

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