Domestic supply reforms seen as key to growth in China
Cadres to discuss new approach to mainland economy as traditional stimulus measures falter
Improving the domestic supply of goods to bolster growth will be a key theme for top Communist Party cadres gathering soon for a conference to decide economic policies and priorities for 2016.
Supply-side reform was highlighted by President Xi Jinping to the central leading group on economic affairs last month and is likely to be endorsed into the policy framework for next year, state media said.
The new emphasis comes as China struggles to put growth on a sustainable track, with traditional policy stimulus such as monetary easing and fiscal spending losing effectiveness.
The mainland is expected to report the lowest headline growth figure in the past three decades this year.
At the same time, exports – once a pillar of growth – are faltering due to uncertainty over the global economic recovery, making it necessary for mainland producers to shift their emphasis to domestic demand.
“Chinese people are getting rich, but they can’t buy what they want from the domestic market,” said Chen Xingdong, the chief China economist for BNP Paribas. “There’s a misalignment between demand and supply, or mainland factories are making products that people don’t want to buy – it’s a serious problem.”
The problem is visible when mainland buyers go to Hong Kong to buy milk powder due to a lack of reliable local supply, or to Japan to buy toilet covers, or to France to buy handbags.
Mainland consumers were estimated to have spent at least 1 trillion yuan (HK$1.2 trillion) last year overseas. Officials want to encourage them to spend more of that domestically.
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“The supply of services is problematic as well. Millions of mainland consumers are seeking better education or even healthcare services abroad,” said Shen Jianguang, the chief economist for Mizuho Securities Asia.
“Traditional demand-side policies of focusing on the three growth drivers of investment, consumption and exports are not effective in addressing these problems.”
Shen said the mainland should continue to cut red tape for businesses, lower tax rates, and encourage mergers to cope with industrial over-capacity.
But supply-side change was a long-term process and would not help immediately, he said.
China had to enhance “structural changes” in both supply and demand, Premier Li Keqiang said last week. It would introduce tax cuts, upgrade manufacturing facilities, and embrace internet-based applications, Xinhua quoted Li as saying.
While “supply-side reform” sounded similar to “supply-side economics” – which advocates lower marginal tax rates and less government regulation – Beijing was unlikely to make across-the-board tax cuts as incentives for companies to focus on domestic markets as US president Ronald Reagan did in the 1980s, said Hu Yuexiao, the chief economist for Shanghai Securities.
“It’s a re-branding of existing mainland policies and a renewed effort to push forward the mainland’s economic restructuring,” Hu said. “In classic supply-side economics, the government should reduce its role in economic activities, but in the Chinese context, the government will continue to play a big role in making supply-side changes.”
