Time for supply-side reform
Chinese leaders have been emphasizing supply-end reforms to provide new traction and growth to their economy, which has been fast losing vitality. Liu He, President Xi Jinping’s economic adviser and director of the Office of the Central Leading Group on Financial and Economic Affairs, first talked of supply-side reform in October and again in November. President Xi and Premier Li Keqiang repeatedly mentioned such reforms. It is now evident that Beijing is embarking on structural reform from the supply end to find a turning point for the economy.
Not surprisingly, an annual four-day Central Economic Work Conference that ended on Monday mainly discussed ways to promote supply-side structural reform. China’s economy galloped for the last two decades through corporate investment, consumption and exports. In other words, its staggering growth has been led by demand. Increasing corporate and private spending and boosting exports is based on a demand-led growth model. It is government spending that mostly sustains the economy due to slowdowns in exports and consumption.
Supply-end growth would promote corporate innovation, restructure the industrial landscape, and lower taxes in order to boost economic activity. The central government wants to upgrade the supply infrastructure to generate new demand and growth in the longer run. Demand would be the effect of economic management, while supply would be the cause.
So why are Chinese leaders suddenly so engrossed with supply-side reform? Teng Tai, director of the independent think tank Winbro Economic Research Institute, has been calling for supply-driven reform to rationalize the use of labor and land to boost productivity for new growth.
Between 2008 and 2009, following the Wall Street-triggered global financial meltdown, the international economy, including major countries like the United States, China and elsewhere, all struggled. But since 2010, the U.S. and Chinese economies decoupled. While the United States found a recovery path, the Chinese economy lost steam during the last five years.
The U.S. economy was helped by unprecedented loose liquidity backed by quantitative easing and ultra-low interest rates, but also by new demand from innovations like the iPhone. Various new innovations based on artificial intelligence stimulated spending, investment and exports, placing the United States safely back in the driver’s seat of the global economy.
Meanwhile, the Chinese economy received a temporary boost from heavy government spending in 2009, but sank since 2010. China is dubbed the world’s factory and the Chinese are starting to become the biggest consumers in the world now that they can afford to spend. The trouble is that they are spending on foreign - not homemade - products.
Authorities have begun to question why. Premier Li said Chinese companies also produce electronic toilet seats, but people travel to Japan to buy them. When big shoppers from the mainland return home from Korea, their bags are stuffed with cosmetics. When they return from Australia or Germany, it’s milk powder. The premier lamented that Chinese companies can’t even produce a decent ballpoint pen - even though China makes 38 billion pens a year. The fact of the matter is that 90 percent of the ink that goes into them is imported from Japan or Germany.
Although China is the world’s largest producer, it fails to meet the standards the Chinese now want. Beijing wants to enhance its supply structure as much as stimulate demand through fiscal spending. Its focus will be intelligence, information, culture, finance and the services sector from now on.
The supply-led reform is now being referred to as “Xi-conomics” - a tribute to President Xi. Beijing will be funneling support to five software areas. It will let zombie companies that survive on government loans to die naturally.
Teng proposes the government bring down tax rates to induce corporate investment so that companies can manufacture products consumers are willing to buy. China is making a landscape shift from a demand-driven economy to a supply-driven one. We must closely watch the changes in the world’s second largest economy to direct our own economy. The economy is like a battlefield. It is important to know the strategy of other actors to stay alive.
JoongAng Ilbo, Dec. 23, Page 32
The author is a JoongAng Ilbo specialist on China.
by You Sang-chul