China turns focus on supply-side reforms

The rapid growth witnessed by the Chinese economy during the last 30 years had capital investment, exports and consumption as its focus areas, which are all generally considered demand-side parameters. For example, in 2008, following the sub-prime crisis in the US, China announced a 4 trillion yuan stimulus package to increase investment in infrastructure projects, and thereby create jobs and stimulate demand for materials used in construction. The rationale behind such a package also included a thought that wages paid to workers in newly created jobs would be spent on essentials and business would flourish.

In the process, however, issues such as income distribution, rising home prices, and overcapacity were not paid attention.

By focusing on supply-side, which means stimulating economic growth through reducing barriers to production especially through tax cuts, wealth owners will be enticed to invest in things that increase supply. These may be in the form of launching new businesses or innovative goods and services. This will generate sustainable, quality growth, according to some analysts.

Currently, China's growth rate has fallen below seven per cent and the economy is no longer marching ahead on the demand-side parameters of investment, exports and consumption. Even changes in banking regulations and interest rates have not worked in favour of increasing investment or consumption.

In tune with President Xi Jinping's view that China should work more on the supply side “while moderately expanding overall demand”, the Central Economic Work Conference held in December 2015 explained that supply-side structural reform aims at cutting capacity, increasing productivity, nurturing new industries and improving the mobility of people.

The supply-side reforms implemented by China so far include abandoning the one-child policy and steps taken to cut housing inventories, reduce business costs, streamline bureaucracy, tackle debt overhang, and eliminate superfluous industrial capacity. These steps are expected to lead to lower prices and consequently boost consumption. (RKS)

Fibre2Fashion News Desk – China