Pressing Ahead With Supply-Side Structural Reform

By+Lan+Xinzhen

Since late November 2016， Chinas Central Government has been dispatching task forces across the country to conduct random inspections on the reduction of steel and coal overcapacity. So far， big steel and coal producing provinces such as Shanxi， Shandong and Henan have already accomplished their reduction targets for the year ahead of schedule， a demonstration of achievements made in supply-side reform.

Over the past years， overcapacity， a high debt-toassets ratio in industrial enterprises， and high operation costs have become the biggest concerns toward the Chinese economy from the international community. To address these problems， the Chinese Government has deployed supply-side structural reforms featuring five major tasks—cutting overcapacity， destocking inventory， deleveraging， cutting costs and strengthening weak links in the economy.

As China starts implementing the 13th Five-year Plan（2016-20） in 2016， supply-side reform has become especially important， as it will directly impact efforts to realize the plans objectives.

To ensure solid implementation of the five tasks， the Chinese Government released an array of mandatory policies， including guidelines on how to cut excessive production capacity in steel and coal. The goal is to reduce coal and crude steel production capacity by 500 million tons and 100 million to 150 million tons， respectively， within the next three to five years. Furthermore， plans have been forged to cut operation costs in the real economy and to replace turnover tax with value-added tax， which will reduce tax paid by businesses by over 500 billion yuan （$72 billion） per year. Guidelines on reducing the leverage ratio for enterprises by mergers and reorganizations have been unveiled as well.

The active implementation of these compulsory documents has led to achievements in supply-side structural reform， which in turn helps to ease the international communitys nerves over the Chinese economy. The resilience of the Chinese economy is an encouraging sign to investors.

Data from the National Bureau of Statistics show that in 2016， the overcapacity-cutting targets for coal and steel are 250 million tons and 45 million tons， respectively. The annual target has been accomplished ahead of schedule and more has been cut than previously planned. In terms of destocking， by the end of August， finished products inventory in industrial enterprises above the designated size—a principal business revenue of more than 20 million yuan （$3.15 million）—had been decreasing for five months in a row. By the end of September 2016， the floor space of unsold commercial residential housing had been in decline for seven months in a row. When it comes to cost reduction， operation costs and the debt-to-asset ratio for businesses have dropped. With regard to strengthening weak links of the economy， investments， environmental protection， agriculture， forestry， water conservancy and infrastructure construction—previously considered as weak links—are growing fast.

A price hike in industrial products is the direct result of supply-side reform， helping to improve business performances. Recently， commodity prices like coal， steel and copper are going up. Rising profits are bolstering expectations on enterprises. The Purchasing ManagersIndex （PMI） in the manufacturing sector staged a strong rebound to 51.7 percent in November. These factors have boosted confidence in the Chinese economy.

Supply-side reform is going toward the right direction. Amid Chinas efforts to restructure its economy， a big problem is that the supply of products cant keep pace with the upgrade of peoples consumption. On one hand， there is overcapacity in some traditional sectors， while on the other hand， the supply of higher-end products and services falls short. By stepping up efforts on supply-side structural reform， cutting overcapacity， destocking， and shutting down zombie companies， good resources are being transferred to sectors fit for Chinese peoples consumption upgrade. This will help improve product quality and industrial upgrading， and thus， these efforts must be continued.

While rejoicing in these achievements， attention should be paid to potential problems. Some enterprises in which overcapacity has been cut， as well as some shut-down enterprises， have the impulse to resume production. To protect local interests， some local governments are reluctant to fully implement certain policies that might affect their interests.

After three decades of economic growth， China is now facing big changes， such as the need to adopt a mentality of “quality” over “quantity.” In the past， economic growth focused on how to best meet peoples ever-rising demand for materials and culture. Today， the task is how to best fulfill Chinese peoples higher-level and more diversified demand. This is not a task for businesses， but requires support from the government and the whole society.

A relaxed attitude toward the implementation of policies， resulting from the periodic success of the reforms， will ultimately impair overall efforts. Therefore， policy implementation must be closely watched.