21 February 2019
Premier Li Keqiang has vowed to intensify structural reforms on both the supply and demand side. Photo: Bloomberg
Premier Li Keqiang has vowed to intensify structural reforms on both the supply and demand side. Photo: Bloomberg

China must focus on supply side reform

Chinese authorities will use the upcoming Central Economic Work Conference to review the macro situation and plan further steps needed to stabilize growth.

Premier Li Keqiang said at a seminar last week that the government will intensify structural reforms on both the supply and demand side in 2016 to ensure steady growth.

The administration needs to step up efforts in supply side reform in order to achieve economic restructuring. The issue is likely to become a hot topic of this year’s economic work conference.

As usual, the conference will be held in mid-December to wrap up the work of 2015 and outline guidelines and tasks for the coming years. The meeting will set tone for next year’s fiscal and monetary policy.

Beijing has adopted a loose fiscal policy and prudent monetary policy to stem the economic slide. However, the country can’t rely merely on stimulating demand to tackle structural issues. It has to kick off supply side reform.

Authorities will shift the focus away from monetary policy to fiscal and supply side reform next year.

The year 2016 will mark the start of the 13th Five-Year Plan period. China intends to double its GDP by 2020 from the 2010 level, according to the target set by authorities earlier.

The government has set an annual growth bottom line of 6.5 percent for 2016-20. 

The economy will have limited boost from trade and investments as they are unlikely to rebound quickly in the short term.

The real economy may continue to struggle in the next two years, and China may see further economic slowdown going forward. In this case, Beijing might maintain prudent monetary policy and adopt proactive fiscal policy.

Inflation figures still hover at low levels, providing room for one or two more rate cuts in the future. There is more room for reduction in bank reserve requirement ratios, given that the renminbi still faces downside risk.

As Beijing switches its focus to fiscal policy, the fiscal gap may widen further amid slowing revenue growth. The government may issue a set of policy finance bonds and also expand scale of a debt swap program.

In the past, China mainly relied on stimulating the demand side, including consumption, exports and investments, to boost growth. However, the supply side management focuses on removing restrictions on factors like population, system, land and capital to increase effective supply and bolster economic growth momentum.

On the macro level, the government might cut some taxes. However, it has to launch sweeping reforms on the micro level in a bid to boost productivity.

The government will adopt structural tax cuts to stimulate innovation, promote Made in China 2025 and Internet Plus strategies, as well as drive growth of tertiary and advanced manufacturing sectors.

Authorities will assist small and micro companies and overhaul systems to boost supply efficiency.

This article appeared in the Hong Kong Economic Journal on Dec. 7.

Translation by Julie Zhu

[Chinese version中文版]

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Senior investment banker

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