XuHongcai
Sincetheglobalfinancialcrisisbrokeoutin2008,oneofthemajorchallengesfortheworldeconomyisdealingwithinadequateeffectivedemand.TheChineseeconomyisfacingthisissueaswell.
XuHongcai,DeputyChiefEconomistoftheChinaCenterforInternationalEconomicExchanges,believesthattheessenceoftheprobleminChinaisthatthequalityofthesupplydoesnotsatisfythedemand.Thesupplyside鈥檚poorqualityhasimpededChina鈥檚plansforeconomictransformation,upgrading,andgrowth.Hisexcerptedviewsfollow:
TheCentralEconomicWorkConferenceheldinDecember2016concludedthatstructuralimbalanceistherootcauseofproblemsfacingtheChineseeconomy,callingforfurtherreformsonthesupplyside.
Lastyear,Chinamaderemarkableachievementsinsupply-sidestructuralreform-cuttingexcesscapacity,destocking,deleveraging,loweringcorporatecostsandimprovingweaklinks.However,therearestillseverechallengesremaining.Theworkofcuttingexcessiveproductioncapacityinsteelandcoalindustrieswasunevenin2016,andsomeshutdownproductioncenterscovertlyresumedworkafterproductpricessoared.
Deleveragingintherealestatemarketachievedremarkableresults,withmorethan80percentofunsoldhousesinBeijing,ShanghaiandGuangzhoubeingsold.Nonetheless,housingpricesinsomefirstandsecond-tiercitiesroserapidlywhilethirdandfourth-tiercitiesstillhadalargehousinginventory.Furthermore,thecostofcorporatefinancing,logistics,energy,landuseandtransactionsisstillnotlowenoughtosupportthetransformationandupgradingofthemanufacturingindustry.Finally,workingcapitalisnotadequateinmanysectorsoftheeconomy鈥檚so-called鈥渨eaklinks,鈥漨eaningcoordinatedandhigh-qualityeconomicgrowthisstymied.
Toaddresstheseproblems,attentionmustbepaidtothefollowingissueswhencontinuingsupply-sidestructuralreformsthisyear.
Correctunderstanding
Supply-sidestructuralreformisatermthatmustbewellunderstood.Somepeoplemistake鈥渃uttingexcesscapacity鈥漚s鈥渃uttingoutput.鈥滸overnmentorderstocutexcesscapacitycouldbemeaninglessundercertaincircumstances.Whenpricesrisebecauseofdropsinoutput,industrieswillnaturallyputtheirshut-downproductioncapacityintooperationagain.
Forinstance,cuttingexcesscapacityinthesteelandcoalsectorsin2016hadmixedresultsmainlybecausesteelandcoalpriceskeptrisingsincethethirdquarteroftheyear.InmajorsteelproducingprovincessuchasHebei,JiangsuandShandong,outputofcrudesteelincreasedrapidlyamidpricesurgeswhileinShaanxi,Xinjiang,InnerMongoliaandShanxi,China鈥檚majorcoalproducers,coaloutputalsogrew.
Thegovernmentshouldinsteadformulatestandardsconcerningenergyandresourceconsumption,pollution,andworkplacesafety.Itshouldalsoensurethateveryoneadherestothesamestandards,ordertheterminationoffirmswhichfailtoobeythestandardsandletthemarketplayitsrole.
Itishardtodemonstratefairnessthroughcompulsoryovercapacityreduction.Manypeoplehavecomplainedthatwhenorderingfirmstocutovercapacity,thegovernmentoffersaidandsubsidiesonlytostate-ownedenterprises(SOEs),whichhavemoredifficultyindealingwiththeensuinglayoffissue,whileprivatefirmshavetosolvetheseproblemsbythemselves.Thisultimatelyleadstoanunfairmarketenvironmentandcompetition.
Toensurefairness,thegovernmentmustformulaterulesconcerningsafety,qualityandemissionreductionstandards,andthenensurethatthesestandardsareobeyedbyall.
Duringthereformprocess,administrativemeasuresareemphasizedbecausetheycanproducerapidresultsandareeasytouse.Butwithoutmarketorientedschemes,thesemeasureswillsoonloseeffectiveness.
Wemuststopusingadministrativeinterventiononmicroeconomicaffairsasawaytoadvancesupply-sidestructuralreform.Itisreasonableforthegovernmenttoguideandnurturemarketschemesinordertosolveproblemscausedbypoorqualityofthesupplyside.However,theultimategoalshouldbetomakethemarketplayadecisiveroleinresourceallocation.
Breakthroughsinkeysectors
China鈥檚economicgrowthwillfollowanL-shapetrend,whichisinlinewiththecurrentnationalconditionandeconomicstructure.However,wecanunleashmorepotentialbyadvancingsupply-sidestructuralreform.Severalexamplescanbecited.AlargenumberofdomesticfarmproductsbecomedeadstockduetopoorqualitywhileChinaimportsalargeamountofforeignfarmproduceeachyear.Also,someChineserefusetobuydomesticmilkforsafetyconcernsandchoosetobuymilkimportedfromcountrieslikeAustraliaandNewZealand.
IfChinesefirmscanachievebreakthroughsinproductsafetyandquality,lesswillbeimported.Forexample,importing$10billionlessayearwillpushupGDPgrowthby0.1percentagepoint.Moreover,intheheavyandfinechemicalsectors,wehavetopay$500-600billionperyearforimportsbecauseofthepoorqualityofdomesticproducts.Chinamustupgradeitsindustriesandmakebreakthroughsinsomekeysectors.
AccordingtotheCentralEconomicWorkConferencelatelastyear,supply-sidestructuralreformalsoincludesinvigoratingtherealeconomy,advancingsupply-sidereforminagricultureandestablishinglong-termmechanismstoensuresoundandstablerealestatedevelopment.Itrequiresthatprogressbemadeinsomekeyareasofreform.Forexample,inthesevensectorsofSOEmonopoliessuchasthepower,oil,naturalgas,railway,aviationanddefenseindustries,mixed-ownershipreformshouldbefacilitated.
Shiftingleverage
Debt-for-equityswapswillbepromotedin2017becausethecorporatedebtratioistoohigh,whichmayintensifypotentialfinancialrisks.Corporateleverageratiosmustbelowered.However,asChinastrivestostabilizegrowth,theleverageratiooftheentireeconomywillinevitablyrise.Therefore,thetransferofleverageisneeded.
Ononehand,thepublicsector,thegovernmentandresidentsneedtoincreaseleverage;ontheotherhand,businesseswillbebetteroffthroughdebt-for-equityswaps,astheschemewillhelpintroducenewstrategicinvestors,improvetheownershipandcorporategovernancestructure,andestablishmediumandlong-termincentivemechanisms-allofwhicharekeyareasforreformin2017.
Inbrief,thesupply-sidestructuralreformshouldfocusonimprovingquality,reducingineffectivesupply,andmakingthesupplystructuremoreadaptabletodemand.
Reducingineffectivesupplyhelpseliminatepoor-performingcompanies,squeezethemarketforlow-qualityproducts,strengthenoversightofproductqualityandcrackdownoncounterfeitcommodities.Focusingonhigher-qualityproductionhelpscompaniesestablishcorecompetitiveness,realizeinnovationdrivengrowth,andnurturemoretimehonoredbrands.
Thesupply-sidestructuralreformshouldfocusonimprovingquality,reducingineffectivesupply,andmakingthesupplystructuremoreadaptabletodemand.Reducingineffectivesupplyhelpseliminatepoor-performingcompanies,squeezethemarketforlow-qualityproducts,strengthenoversightofproductqualityandcrackdownoncounterfeitcommodities.Focusingonhigherqualityproductionhelpscompaniesestablishcorecompetitiveness,realizeinnovation-drivengrowth,andnurturemoretimehonoredbrands.
XuHongcai,DeputyChiefEconomistoftheChinaCenterforInternationalEconomicExchanges