25 October 2016
China must focus on enhancing the quality of products and services in a bid to boost domestic consumption. Photo: Bloomberg
China must focus on enhancing the quality of products and services in a bid to boost domestic consumption. Photo: Bloomberg

Supply-side reform key to China’s economic future

To stimulate domestic consumption and shore up the economy, China needs to ramp up supply efficiency and offer more quality products and services to its citizens, while also supporting industries such as information technology, tourism and green businesses.

To achieve this end, the government has to draft a roadmap. Several top leaders and government officials have already outlined the direction.

Official of the Central Leading Group on Financial and Economic Affairs and the National Development & Reform Commission pledged in October to step up market reforms and pay more attention to supply-side adjustment and phase out the so-called zombie enterprises to tackle the overcapacity issue.

On Nov. 10, President Xi Jinping said in a meeting that the country should enhance supply-side structural reforms while expanding aggregate social demand.

Premier Li Keqiang said a week later that China should upgrade its industry and help it move up the value chain, while stepping up work on both the supply and demand side.

Chinese leaders have repeatedly touched upon supply-side reform, which reflects the thinking behind the nation’s economic reform as it shifts from demand management to supply management. The policy pivot will only become more pronounced in the future.

The key of supply-side reform is to increase productivity and enhance economic efficiency. Through economic restructuring, transaction costs can be brought down for companies and help the firms boost their earnings.

As China readjusts its economy, the overall growth rate may fall further in the coming years. But the central government is unlikely to unveil any massive stimulus package.

That said, Beijing will still have plenty of pro-growth measures. 2016 is set to be a challenging year, and China may continue to undergo a painful period of economic restructuring.

Meanwhile, the priority of the government policy will shift to improving the quality of products and services, and accelerating the elimination of excess industrial capacity.

Excerpted from an article that appeared in the Hong Kong Economic Journal on Dec. 14.

Translation by Julie Zhu

[Chinese version中文版]

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Senior investment banker

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