Transformation Through Structural Reform

The 13th Five-Year Plan （2016-20） period is crucial in Chinas modernization process， as is the year 2020 in terms of readjusting the countrys economic structure and transforming its growth pattern. At the same time， 2020 also serves as the deadline for Chinas completion of its goal to build a moderately prosperous society. The achievement of all development goals during the 13th FiveYear Plan period will be paramount if China is to foster fair and sustainable economic growth for the foreseeable future.

Chinas economic transformation is at a pivotal juncture. On one hand， a slow economic shift would intensify downward pressures. China registered a GDP growth of 6.9 percent in 2015—but even though the economy is stable—growth suppression has been increasing. If the pace of the economic transformation were to decelerate， it would not only intensify negative effects in the short term， but also raise concerns on Chinas mid- and long-term economic prospects.

On the other hand， investment-driven growth has reached the end of its line. China is now facing severe challenges with regards to cutting excessive industrial capacity， destocking and de-leveraging. The formation of excessive production capacity， unsold homes and high leverages were inevitable outcomes of the investment-driven era， and also highlights the unsustainable nature of the investment-led growth pattern.

Whether or not cutting excessive industrial capacity， destocking and de-leveraging will be effective depends on the success of the planned breakthroughs in readjusting the industrial structure. During the 13th Five-Year Plan period weve just entered， and especially throughout the coming two years， if the government leads China toward the appropriate path， the downward pressures of economic growth in the short term will be alleviated. If this is the case， the country would unleash its significant potential for economic growth in the middle and long term. Otherwise， the country might lose the initiative in terms of economic growth， thereby arousing systemic economic and social risks.

Why is the 13th Five-Year Plan period crucial for the structural reform？

First of all， economic transformation faces obstruction from a variety of structural problems. An outstanding example of such an issue is that the current structures of supply and demand dont complement each other. The demands role in guiding the supply has not been developed to its full， and at the same time， the supply has not met demand effectively. Therefore， while expanding the total demand appropriately， the government should intensify the supply-side reform in order to improve the quality and efficiency of the supply system.

Second， there are serious structural problems between consumption and investment. Since the 12th Five-Year Plan （2011-15） period， the imbalance between the two has been improved， with consumptions contribution to GDP rising. However， since the investment-driven growth pattern hasnt been fundamentally changed， those two factors have yet to find equilibrium. Also， problems featuring inadequate supplies to bolster consumption have become increasingly prominent.

Third， there are inherent issues in the policy being made and the institutions driving them forward. To alleviate the economic stresses， we shouldnt rely solely on policy stimulus， but on institutional arrangement and innovation， too. For instance， stimulus policies， especially macro financial control measures， should be the last resort to prevent systemic risks by cutting excessive capacity. Institutional problems causing surplus capacity should be eliminated through a change in the administrative approval system， a market-oriented adaptation to production factors， the improvement of the taxation system and the revision of the financial system.

Facing these problems， the government should be more committed to advancing structural reform and exploring new paths to clear its obstacles.

To begin with， the reform should be adopted in order to advance industrial restructuring. After China entered the middle and late stages of industrialization， the emphasis in market resource allocation was transferred from the industrial sector to the service sector. The market should therefore be relied on to develop mainly modern producer services and advance the transformation of the manufacturing industry.

Next， all economic restructuring should be oriented with the revamping of urbanization policies. China will enter a new stage in its plans to urbanize its population during the 13th Five-Year Plan period. The government must consequently seed the household registration system with new ideas， aiming to accelerate the process and unleash the biggest dividends in the future.

Furthermore， structural reform should push forward consumption restructuring. The key to realize the major breakthroughs needed for a consumption-driven growth pattern is to innovate in terms of supply， satisfy the increasingly diversified and individualized demands of consumers， and accelerate the transformation of investments.

The Third Plenary Session of the 18th CPC Central Committee held in November 2013 put forth a master plan for bolstering economic reform. The achievements in the last two years have showed that reform in some fields has been progressing at a rapid pace， grasping real breakthroughs. But in other sectors， the reform has been carried out slowly.

Ever since the reform has reached deeper into the core of the economy， fundamental changes have taken place in the conditions necessary for restructuring， making reform efforts more difficult and complicated. This therefore requires that the government establish new ideas in developing the economy in an innovative， coordinated， green， open and inclusive way. Furthermore， the government should break down the confinement of interest groups and build a better environment for reforms， so as to provide impetus for the economic transformation.