We have launched E-mail Alert service,subscribers can receive the latest catalogues free of charge

 
 

Understanding Supply-Side Structural Reform in a Right Way

Nov 15,2016

By Wang Yiming,Chen Changsheng& Li Chengjian

Research Report Vol.18 No.4, 2016

Since 2010, China’s economy has geared down with some fluctuations for more than five years, showing some unprecedented trends and features. Among them, such problems become increasingly prominent as imbalanced and uncoordinated supply-demand relationship, especially the obviously delayed adjustment of the supply side to match the demand. Hence it is of necessity to accelerate the supply-side structural reform while moderately expanding aggregate demand. Supply-demand relationship should be coordinated, and distortion in factor allocation should be rectified by means of reform. Inefficient and low-end supply should be reduced while efficient and high-end supply should be expanded. Factor flow and optimized allocation should be advanced. In this way, a better balance between supply and demand can be achieved.

I. Reasons for Supply-Side Structural Reform

Drastic changes have taken place in the demand structure. To start with, the demand structure featured with accommodation and transportation enters into a new stage. Urban permanent residents in China owned one housing property on average in 2013, and every thousand people had over 100 vehicles in 2014. According to international experience, there will be obvious changes in the market demand for accommodation and transportation at this stage. Since 2013, there were less newly-built houses and sales, and automobile sales began to grow slowly. Second, the demand structure is upgraded in a faster way. With growing income and population with middle income, people expect much better quality and performance of products, and demand for more diversified, personalized and high-end products. Third, service demand takes up a larger proportion of consumer demand. Due to the declining Engel’s Coefficient, greater education attainment and faster population aging, rapid growth is seen in the demand for tourism, elderly care, education, and healthcare services. Fourth, the improved industry value chain raises higher requirements for productive services like R&D, design, supply chain management, marketing network, and logistics. The supply side fails to adapt to the changing demand structure. First, there is too much inefficient and low-end supply. Some traditional industries experience excess capacity and low rate of capacity utilization. The year of 2015 saw the drop of steel and iron production for the first time since 2000, and of cement output since 1990. Second, there is a lack of efficient and high-end supply. As supply-side adjustment obviously lags behind the upgraded demand structure, people find it hard to meet their demand for quality goods and services. They turn to purchase daily necessities in large quantity abroad, diverting domestic consumer demand to overseas. Third, institutions and mechanisms become the stumbling blocks for the supply-side adjustment. Subject to such constraints, supply-side adjustment is reluctant and delayed to show effect, causing the facts that it is hard to allocate factors of production in efficient sectors rather than in inefficient ones, in high-end sectors rather than low-end ones. The potential of supplying new products and services has yet to be released. Rebalancing the supply and demand calls for the supply-side structural reform. It is a prominent problem that supply does not match demand well in China’s economy with the main problem lying in the supply side. Specifically speaking, excess capacity is dealt with at a snail’s pace; diversified, personalized and high-end demand can hardly be met; and the adjustment of the supply structure is hampered by institutions and mechanisms. Policies for managing demand pay much attention on the aggregate demand and short-term regulation, which fails to eliminate structural problems in supply-demand relationship, and fails to fundamentally reverse the downward trend of potential economic output. At present, we can achieve better supply-demand balance and foster stronger inner momentum for sustainable and sound economic development only by removing excess capacity at a faster pace, eliminating “zombie” companies, advancing assets restructuring, cultivating strategic emerging industries and services, and establishing institutions and mechanisms conducive to the supply-side adjustment.

II. International Context for Supply-Side Structural Reform

The underlying problem of slow economic growth worldwide lies in the sluggish structural reform. Since the outbreak of the global financial crisis in 2008, major economies like the United States, the European Union and Japan have adopted unprecedented quantitative easing policies, aiming to largely increase market liquidity and boost market confidence through ways like purchasing assets and bonds, lowering interest rates to zero or even negative. But in reality, global economic recovery remains quite slow; market demand is sluggish; prices of bulk commodities drop sharply; and total factor productivity in major economies does not grow as fast as before. All these facts show that stimulus plan solely for demand does not achieve expected effects as it was supposed to be. The short-term polices for managing demand, though having cushioned some shocks of the crisis, fails to rid the middle and long-term structural problems. Therefore, economic growth still calls for structural reform. The new international division of labor urgently calls for structural reform. In the past years, European and American countries were consumers of finished goods; East Asian countries were manufactures; and the Middle East, Latin America, Africa and other regions were suppliers of energy and raw materials. However, this “great-triangle-style” division of labor started to change after the outbreak of international financial crisis. Europe and America, unable to maintain credit-dependent consumption, return to re-industrialization strategy, which attract some high-end manufacturing industries coming back. Producers of raw materials of energy, under the pressure of the rapid development of new energy technology, focus on extending the industrial chain and improve added value of products. Economies with rich human resources seize international market for labor-intensive industries by virtue of low labor cost. As the global division of labor is adjusted faster and cross-border capital re-allocated, major economies strive to go higher in the global division of labor through structural adjustment. ...

If you need the full text, please leave a message on the website.