Tuesday, Apr 25, 2017, 6:52 AM CST – China

Editorial

China needs to tackle its ‘supply-side’ problem

It now has become clear that the major problem does not lie in a lack of consumer demand, but in the domestic supply chain.

During a recent Party meeting, Chinese President Xi Jinping stressed that China should strengthen structural reform of the “supply side” of its economy, increasing quality and efficiency and providing impetus for sustainable economic development.

Xi’s reference to so-called “supply-side structural reform” indicates that the Chinese leadership has adopted a new way of thinking on addressing China’s macroeconomic problems.

In decades past, the Chinese government has largely embraced Keynesian, also termed “demand-side,” theory in managing its economy. According to economist John Maynard Keynes, aggregated demand is the primary driving force for economic growth, and China’s government has consequently responded to its recent slowdown by resorting to lowering interest rates and increasing government spending to boost demand. In reaction to the global financial crisis in 2008, China launched a 4 trillion yuan (US$619bn) stimulus package. To tackle a persistent economic slowdown in recent months, the Chinese government has cut interest rates several times.

However, as Keynesian theory mainly focuses on short-term changes in the economy, China’s approach appears to have failed to address recent economic difficulties stemming from deeply rooted structural and systemic problems, such as excessive government interference in the markets, a lack of rule of law and relatively high tax rates.

In recent months, China has banked on increasing domestic consumption to inject new vitality into its economy. However, it now has become clear that the major problem does not lie in a lack of consumer demand, but in the domestic supply chain.

It is estimated that Chinese tourists spent over 1 trillion yuan (US$155bn) during their overseas trips in 2014. Most of the commodities they purchased abroad are actually available within China – clear evidence that China’s supply system requires serious reform to become more competitive.

In conducting such reform, China should take a lesson from supply-side theory, which recommends lower tax rates and deregulation as a means to boost the economy. The government needs to push forward its rule-of-law initiative and conduct structural tax cuts to encourage innovation and create a healthy business environment. Only when there is an efficient and innovative supply system can China unleash its economic potential. 

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