On 14th Dec, the Political Bureau of the Communist Party of China Central Committee had its last meeting before the Central Economic Work Conference.
With the theme of discussions in economic work in 2016, the meeting was actually to set a tone for the Central Economic Work Conference.
"Reduce the number of unsold homes” is quite a hit phrase spreading through the media. However, to solve this “unsold homes” problem, we’d better understand one more key phrase that mentioned in the meeting: “reform of the supply front”.
The Frequent Phrase
Actually, “reform of the supply front” is a new economic term. It has been mentioned quite a lot by the China government one month ago.
Back in 10th Nov., the phrase “reform of the supply front” was first proposed at the 11th meeting of the Central Finance and Economy Leading Group. This was also the first time for this phrase to appear in a central meeting.
Later on, President Xi Jinping also mentioned this phrase in his speeches in both G20 Summit and APEC and considered the “reform of the supply front” as a solution to the doldrums of the China’s and world’s economy.
However, “the media hasn’t paid enough attention to it and it seems that the economists don’t care”, stated by He Keng, former Vice-Chairman of the Central Committee of the Jiusan Society.
So, here comes the question: what is “reform of the supply front”?
Supply front
The opposite of the supply front is the demand front. In fact, to manage the demand front is always how China government manages the China’s economy for over 30 years.
To be specific, investment, consumption and export all belong to the demand fronts to boost the economy in China.
Moreover, the “4-trillion” plan (proposed by the China government in 2008 to cope with the international financial crisis), and macro regulations like reduction of interest or RRR (reserve requirement ratio) cuts all belong to management of the demand fronts.
In fact, the theory of the demand front management believes that the insufficient demand is to be blame for the slow economic growth. Thus, to boost the economic, the government needs to stimulate demand in different ways.
However, the reform of the supply front holds a different theory on how to boost the economy. It believes that it is limited for the government to just focus on investment, consumption and export to boost the economy. The government should focus on the supply and produce fronts to emancipate the productive forces and improve the competitive.
As for the China government, simply stimulating the economy is far away from enough. The structural reform is needed.
The structural reform of supply and demand in China
What do Chinese spend money on abroad? On the material needs, they buy handbags, milk powder, medicine, toilet seats and rice cookers. On non-material needs, they spend money on education, medical treatment, tourism and etc.
Are there such products or service in China? Yes.
But are there products or service with high quality like overseas? Very few.
Hence here comes the contradiction between supply and demand in China.
China is already the world's biggest manufacturers with the most trading volumes. However, the quality of China’s products is not high. A large number of clothes, bags and toys with low quality could not sell well. The China government is still unable to provide Chinese people in undeveloped regions with good education and medical treatments.
It is the same condition for the real estate and the financial industry.
Only depending on investment or export cannot solve the contraction. In recent years, the import and export volumes in China have decreased so has the growth rate of investment. The reform of the supply front has a promising future. For example, before the invention of cell phones, people had no effective demand for it. However, after the appearance of smartphones, the consumer demand was beyond expectation.
Therefore, as for the reform of the supply front, “China should strengthen structural reform of the supply front to increase the quality and efficiency of supply system” stressed by President Xi.
That is to say, to deal with the economic distress in China, the government should also focus on the reform of the supply front, but not only the demand front. That’s what structural reform really is.
Actually, since the 18th National Congress of the Communist Party of China, China has kept promoting “making structural adjustment and carrying out reform”. Now, we know that China has focused on the supply front.
The future direction
The overcapacity from different industries and the unsold homes in the real estate need to be digested; the economic development in north-eastern areas is sluggish; the companies have to undertake high cost in their development; it is still difficult for the medium or small size companies to borrow money from the banks; the capital chains often break; 70 million poor people are trying to improve their living conditions; different kinds of social services still need to improve.
To elevate the society, the government needs to develop a better market-oriented economic system, instead of a government-oriented economic system. China really needs to propose policies to better allocate and employ factors of production.
As what President Xi stressed on this conference: “Digest the overcapacity, reduce the burden of the companies, reduce the numbers of unsold homes, avoid the financial risks and develop healthy stock market”.
What President Xi stressed may not have a direct link with the supply front, but it is connected greatly with how to reform the supply front.
To digest the overcapacity and reduce the number of reduce homes are actually to help withdraw some companies from the industries which are with the problems of overcapacity. It helps clear the market and leave behind the competitive companies.
To reduce the burden of the companies and develop the healthy financial market is to provide protection for the companies. More importantly, it is to guide the companies to get into the industries with the real structural contraction and insufficient supply.
That is to say, this is the real trend which people should pay attention.
*This is a translated and re-edited version by CCM. The original article comes from www.cnchemicals.com/.
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