Disrupting status quo and meeting actual demand key to supply-side reform success

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March 23, 2016

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Disrupting status quo and meeting actual demand key to supply-side reform success

By Ni Tao | March 23, 2016, Wednesday |

Print Edition

Soon after Chinese President Xi Jinping first mentioned the term “supply-side reform,” it quickly caught on as a buzzword to describe China’s ongoing economic restructuring.

This term has been heavily bandied about in the media, where it’s used as shorthand for government efforts to reduce idle capacity, phase out polluting businesses, eliminate industrial inefficiencies and scale back inventories.

There’s also been an outpouring of scholarly interest in this topic, as evidenced by a recent slew of seminars and research reports.

Among these reports is one recently published by Shanghai’s Fudan University. Entitled “Annual Analysis Report on China’s Industrial Development: 2015,” it examines economic conditions from an industry-specific perspective, while also offering specific policy advice to guide efforts going forward.

“The report is very revealing about the biggest drain on the Chinese economy,” said Professor Rui Mingjie of Fudan’s School of Management, who led the study.

Speaking on the occasion of the report’s official release last week, Rui argued that the heaviest weight on country’s economy are the so-called “basic industries,” which the report identifies as producers of coal, steel, cement and other basic commodities. These industries have taken some of the worst beatings amid the country’s growth slowdown.

Take steel makers for example. From 2013 onwards, the country’s steel inventory has increased at an annual rate of 20 percent, says the report.

Part and parcel

Claiming that eliminating idle capacity will be a long-standing concern, Rui added that “it is part and parcel of the supply-side reform.”

Complicating the decline of traditional industries is the fact that they also lack the capacity to produce the type of high-end goods that the market now craves. The dearth of these homegrown products can only be made up for by massive imports from overseas, says the report.

In the eyes of experts like Rui, the much-publicized supply-side reform is not solely about cutting capacity; it is also about filling the gap between what businesses can offer and what the consumers really need.

Unfortunately, reforms meant to cut capacity seem destined to encounter resistance from powerful vested interests. Caught in the current downturn, many provincial authorities are desperate to hold on to local steel mills and cement plants for the sake of GDP growth and job creation. Instead of shutting them down, officials sometimes conspire with businesses to lift their yearly capacity so as to exempt them from the national ordinance demanding closure of retail steel operations categorized as “wasteful” and “polluting.”

It has been argued, time and again, that supply-side reforms ought to be relentlessly severe to force “zombie” enterprises out of business.

This would entail an “adjustment” in the government-business relationship, with the purpose of dissuading governments against hasty bailouts of companies in distress.

In contrast to the decay of traditional industries, the Fudan report paints a much rosier picture for burgeoning new sectors of the economy.

Take high-speed rail, a major success story in efforts to improve the image of “Made in China.” The industry is at the frontier of Chinese outbound investment, with numerous deals signed over the years on technological transfer related to high-speed trains, equipment and services.

Meanwhile, sectors like electric cars and robotics reported growth of more than 50 percent in the first quarter of 2015, says the report.

China is faring even more swimmingly in the Internet economy, particularly with mobile payment, e-commerce and Internet finance. In 2014, China’s e-commerce sectors saw transactions totaling a whopping 13.4 trillion yuan (US$2 trillion), up 31.4 percent from the previous year.

Robust as they are though, these sectors still represent a small portion of the economy. “They are like ponies, too small to pull the big cart of the Chinese economy,” said Rui.

The Fudan professor asserted that for supply-side reforms to succeed, there will have to be a shift in attention toward the “demand” side of the ledger.

In light of consumer spending patterns last year, there is great potential for the market — or the state — to provide quality services in tourism, culture or health care.

Therefore, Rui encouraged decision makers to prop up a few flagship enterprises capable of leading industrial upgrades.

Another major policy recommendation he offered was revamping the tax regime, whereby different tax rates are applied to different businesses. “For sectors representing the future, we ought to lower their tax burden, while no similar attempts should be made to benefit outdated industrial ‘zombies,’” said Rui.

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Disrupting status quo and meeting actual demand key to supply-side reform success

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