Currently, the world economy is undergoing profound adjustment in the aftermath of global financial crisis, assuming a mediocre situation of low growth-rate, low inflation and high-debt. At the same time, the economic performance of China shows some new situations and features: some major periodic changes gradually emerge, the contradiction and problem of imbalance and in-coordination between supply and demand become prominent. Therefore, while maintaining the basic stability of aggregate demand, China needs to accelerate the structural reform of the supply side, rectify the mismatch between structures of supply and demand as well as misallocation of elements, cut down ineffective supply and low-end supply, expand the scale of effective and mid-to-high-end supplies, enhance the flowing and optimal reconfiguration of elements, and achieve the re-balancing between the supply and demanding sides at a higher level.

 

1. Structural reform of the supply front is the action plan leading the “new normal”

 

Looking from the international background, though eight years have passed since the break-out of the global financial crisis, the impact of crisis could still be seen everywhere. Global economy is still yet to get rid of crisis thoroughly, and some abnormal phenomenon and problems which could not be explained by past experience or beyond the understanding of most people emerged. First, significant monetary easing accompanied with the pressure of deflation. In the aftermath of financial crisis, major economies of the world were all implementing unprecedented loose monetary policy, while under such circumstance, what we saw is deflation or the pressure of deflation. Second, what accompanied the rapid rise of debt was sustained sluggish growth and the ratio of aggregate debt of the whole world to GDP surpassed 250%. However, the growth rate of global economy is still slowing down and a large quantity of debt could neither be transformed into effective investment nor brought high growth rate for global economy. Third, the irreversible process of globalization went hand in hand with the sharply slow-down of growth rate of global trade. While various multilateral and bilateral trade agreements were being pushed forward at a fast pace, growth rate of trade in recent years has been slowing down. Fourth, new technological revolution accompanied with the declining of productivity. Growth rate of total factor productivity and labor productivity of major economies of the world, except India, all took the trend of falling down, which demonstrated that technological advancement did not effectively brought productivity gains.

 

These strange phenomena of world economy triggered policy introspection on a global scale. A series of problems were posed in front of people, such as what are the problems with global economy in the era of post financial crisis; are policy theories which have been guiding our economy for a long time still effective; should we comprehensively review the effectiveness of Keynesianism. Countries around the world were all exploring on how to launch new structural reform so as to reshape growth momentum and growth pattern.

 

At home, Chinese economy took on some new characteristics different from the past and how to adapt to and lead new normal has become a question exercising the minds of enterprises, government at all levels and residents. In the past three years, the Central Government of China explored along the road of “what’s the problem, how to see, how to do” to seek the recipe for economic governance. After proposing the concept of “simultaneously deal with the slowdown in economic growth, make difficult structural adjustments, and absorb the effects of previous economic stimulus policies” in 2013 and the judgment of “China’s economic development has entered a new normal” in 2014 answering the question of “how to see”—the Central Government proposed to strengthen structural reform of the supply side in 2015, which offered an answer to the question of “how to do”. The policy of structural reform of the supply side was not only based on the concrete domestic and international situation, but also in particular targeted at the principal contradictions in the economic operation of China. Therefore, it is a strategic action program accurately grasping and leading the new normal.

 

2. Structural reform of the supply front was targeted at resolving the mismatch between supply and demand

 

Obvious changes have taken place in terms of demand structure of China. First, demand structure dominated by “housing” and “travelling” appeared a periodical variant trend of slow growth. Second, with the improving of resident income and expanding of middle-income group, the transformation and upgrading of demand structure accelerated. Third, the share of service demand at total consumption demand improved dramatically, especially demands of services such as tourism, nursing, education and medical care. Fourth, the industrial value chain promoted and China moved towards the middle and high end of value chain, and the market raised higher demands on productive service such as research and development, designing, standards, supply chain management, marketing network, and logistics distribution.

 

Meanwhile, the contradiction was prominent as the supply side obviously failed to meet the changes of demands. This was primarily reflected in the following aspects. First, there is a plethora of ineffective and low-end supplies. For instance, traditional industries such as steel and cement manufacturing were confronted with rampant over-capacity. Second, effective and mid-to-high-end supplies were inadequate and demands of residents for high quality goods and service could not be met, which caused outflow of domestic consumer demands. Third, traditional systems and mechanisms hindered the adjustment of structure of supply side—productive elements failed to transfer from the fields of ineffective demands and low-end supplies to the fields of effective demands and mid-to-high-end supplies, and supply potential of new products and new service is still yet to be released.

 

The mismatch between the structures of supply and demand has become a prominent contradiction of the Chinese economy and the principal aspect of the contradiction lies in the supply side. However, policies on demand management were focused on resolving the problem of aggregate quantity and emphasized short-term regulation, which can neither resolve the contradiction between the structures of supply and demand thoroughly, nor fundamentally reverse the downward trend of economic potential output. At present, only by accelerating the clearing of excessive capacity, properly disposing zombie enterprises, promoting the reorganization of assets, fostering the service sector and emerging industries of strategic importance, establishing the systems and mechanisms in favor of structural adjustments of supply side, can we realize rebalancing of supply and demand at a higher level and reshape the internal impetus driving the health and sustainable development of the Chinese economy.

 

3. Structural reform of the supply front adapts to the requirements of adjustment of international division of labor

 

Since the break out of the international financial crisis, major economies such as the United States, European Union and Japan all implemented unprecedented quantitative easing policy. However, looking from the practical results, global economy recovered slowly, market demands remained sluggish, commodity prices dropped sharply, and growth rate of total factor productivity of major economies slowed down. Obviously, demand stimulus could not achieve the expected effects. Although the short-term policy of demand management played a certain role in countering the effect of crisis, the middle-and-long-term structural problems have not been resolved completely, and the strengthening of long-term economic boosting impetus calls for the promotion of structural reform.

 

Meanwhile, over a long period in the past, European and North-American countries have been the major consuming market of finished products; East Asian countries have been the major manufacturing base of goods; regions such as Middle East, Latin America and Africa have been the major source of energy and raw materials. Since the global financial crisis, this labor division pattern of “big triangle” has been changing quietly. European and North American countries promoted the strategy of re-industrialization, and some sophisticated manufacturing returned to these countries; under the pressure brought by the rapid development of new energy technology, energy and raw material producing countries strove to extend industrial chain and improve the incremental value. With their cost advantage in labor force, countries rich in human resources managed to occupy the international market of labor intensive industries. With the acceleration of adjustment of global division of labor and the re-allocation of cross-border capital, major economies all strove to, via structural reform, improve their advantage in terms of labor division and occupy a more beneficial position in international labor division.

 

Under such circumstance, with the gradual improvement of element cost of China, our traditional comparative advantages are gradually weakening, and new competitive edge is still yet to be formed, thus facing a double extrusion situation made by advanced countries and catching-up economies. This requests that China work from the supply side, accelerate the transformation and upgrading of industrial structure, improve international competitiveness, convert the focus of competition from prices to quality, technology, brand and service, and cultivate new comparative advantage. Accelerating structural reform plays a pivotal role in reshaping the competitive edge of China on the international stage.

 

4. Structural reform of the supply front calls for the “problem oriented” working method

 

First, strive to reduce ineffective and low-end supplies. Excess production capacity and excessive inventory are the prominent features of ineffective and low-end supplies. Excess productive capacity and excessive inventory occupied a large amount of productive elements, such as factory buildings, land, equipments and labor forces, which made productive elements fail to convert from fields of over-capacity and inefficiency to fields with market demand and high efficiency, and lowered the efficiency of resource allocation. Clearing excessive industrial capacity and destocking are fundamental measures for reducing ineffective or low-end supplies and improving the efficiency of economic operation.

 

Second, make every effort to expand the scale of effective and middle-to-high-end supplies. Inadequacy in terms of effective and middle-to-high-end supplies is one of the major reasons for the out-flowing of domestic consumption capacity and hindering the releasing of consumption potential. In 2015, the outbound travelling of China reached 120 million person times, with a total outbound consumption of 1.5 trillion RMB yuan, among which at least one half of the money was used on shopping and the level of commodities they bought took the trend of moving downward. This phenomenon reflected that the supply system and product quality of China obviously cannot meet the changes of market demand, or the requirements posed by upgrading of residents’ consumption structure. It is necessary to, via structure reform of the supply side, improve the adaptability of the supply side, improve the attractiveness of Chinese products, as well as boost the capacity for effective supplies.

 

Third, work hard to promote reform on systems and mechanisms. Currently, industry access constraints hindered the free flowing of productive elements among and inside industries. Concealed obstacles named “glass doors” “swing doors” and “revolving doors” strengthened the difficulties of the access of private enterprises. Imperfect financial market lowered the efficiency of capital allocation. The imperfect market credit system and not-well-protected consumers’ rights made consumers “vote with their feet” and converted to outbound consuming markets. Weak protection on intellectual property right constrained the releasing of technological innovation potential of enterprises. Structural reform of the supply side is desperately needed so as to smooth the channel for element flowing and reallocation, and enable productive elements transfer from fields of ineffective demands and low-end supply to fields of effective demands and mid-to-high-end supply, thus improving the efficiency of element allocation.

 

5. Structural reform of the supply front still calls for sound demand management

 

Supply and demand form a unity of opposites, and it is one of the important requirements for economic growth to keep a dynamic equilibrium between aggregate supply and aggregate demand. Supply and demand are the “two faces of the same coin” for macro-economic management and implementing structural reform of the supply side does not necessarily mean to abandon demand management.

 

On the one hand, structural reform of the supply side could not work without the support of demand management. Structural reform may in the short term cause certain shrinking effect----debt risk and disguised unemployment pressure will unleash intensively. Therefore, the important stabilizing role of demand management should be employed in an effort to avoid inflaming contradictions and potential risks due to the short-term rapid slowdown of economic growth and prevent the magnifying of reform difficulties and costs. At present, we should make the best of the “time window” of structural reform of the supply side, appropriately set the intensity of demand management according to the overall deployment, agenda and pace of reform, and foster a stable macro-economic environment, thus creating a good environment for the orderly advancement of reform.

 

On the other hand, structural reform could also play the role of boosting demand. The five priority tasks of structural reform of the supply side, namely cutting excess productive capacity, destocking, de-leveraging, reducing cost and improving weak links, were aimed at realizing new balance between supply and demand at a higher level. Meanwhile, via innovation in terms of products and service, and improvement of product quality, structural reform of the supply side could attract and create more domestic and international demand. For instance, in the process of destocking in the real estate sector, the policy of monetization of indemnificatory housing distribution, the policy of encouraging residents to buy stock housing with monetary subsidies in the process of shantytown redevelopment, as well as lowering the threshold of down payment ratio for commercial residential house purchasing, while playing their roles of de-stocking, will also stimulate related consumption such as decoration material and home appliances. By increasing investment in underdeveloped and rural areas, as well as improving infrastructure and public service, the job of improving weak links could drive the boosting of investment and consumption.

 

6. Structural reform of the supply front calls for the good coordination between short-term and mid-to-long-term jobs

 

On the one hand, starting from “make the subtraction”, structural reform on the supply side should in the first place resolve prominent contradictions. By cutting excess productive capacity, it is expected to enhance the elimination of low-efficiency enterprises and the reasonable restoration of prices of industrial products, and reverse the overall declining of business profit. By destocking, reducing inefficient occupation of capital, lowering the risk of debt default, stabilizing the property market, it is expected to take advantage of the features of real estate huge in scale, as well as highly related with and could strongly drive the development of a wide range of industries to avoid large fluctuations of economy. By de-leveraging and reducing costs, it is expected to reduce the burdens on enterprises, improve the financial situation and solvency of businesses, ease the rise of non-performing loans in the banking industry, guide the flowing of capital into real economy, and improve the vitality of real economy and the overall benefit of national economy.

 

On the other hand, by doing “add” “multiply” and “divide”, structural reform of the supply side is expected to improve efficiency of resource allocation, total factor productivity as well as the quality and benefit of economic growth. “Doing add” is to promote industrial transformation and upgrading, nurture a series of emerging industries, such as new generation information technology, new energy, bio-medicine, sophisticated equipment, intelligent manufacturing and robots, and form a strong development impetus with the support of these new growth engines. “Doing multiply” means to turn to innovation-driven development, increase investment on research and development, strengthen protection for intellectual property right, optimize the incentive mechanism for the commercialization of research findings, and improve the contribution of technological advancement to economic growth. “Making divide” requires to improve the output of per unit factor input, improve the skills of labor force and their competitiveness in the labor market via increasing investment on human resources and strengthening vocational education, and improve labor productivity; by reform on price formation mechanism of energy and resources, introduce market-dominated trading mechanism, improve the utilization efficiency of energy and resources, and entrench the foundation for the sustainable development of economy.

 

New normal is the background of economic development of China at present and in the expected future. Structural reform of the supply side is a strategic movement catering to and leading the new normal and it answered the question of “how to do” in new normal. We should thoroughly implement the five concepts for development of “innovation, coordination, green, open and sharing”, take advantage of the policies of “cutting excess productive capacity, destocking, de-leveraging, reducing cost and improving weak links”, keep the basic stability of aggregate demands, and strengthen structural reform of the supply side, so as to realize a good start of the 13th Five-Year Plan period, maintain a mid-to-high growth rate, and move towards the med-to-high-end in international labor division, thus realizing the first one-hundred-year objective of building a moderately prosperous society in all aspects by 2020.

 

    (Chen Changsheng, Deputy Director of Department of Macroeconomic Research, Development Research Center of the State Council)