The Great Transformation

The following sections are included:

• Foreword
• About the Author
• About the Translator
• Contents

China’s current economic operations are encountering several contradictory problems at both the supply side and the demand side, but the root of these problems lies heavily in the supply side. Since the root problem on the supply side is the sluggish reform of institutional mechanism, it is necessary and inevitable to promote supply-side structural reform in China. The supply-side problems will be addressed in three aspects: intensive and economical supply of production factors, efficient and high-quality supply of products, and efficient supply of institutions, where top priority is given to supply of institutions. China’s supply-side structural reform differs essentially from that in western countries including the UK and the USA in the theoretical basis, practical background, institutional environment, policy instruments, and dynamic mechanism, and it cannot be viewed as a replica of western supply-side economics. During the supply-side structural reform, we need to properly handle four important relationships: between supply and demand, long term and short term, government and market, and the domestic and international. The supply-side structural reform is a systematic project that involves all aspects of the socio-economic development. Successful implementation of this project depends first on whether we can quickly seek out new engines for economic growth as the traditional engine fails and second on whether we can create a new engine for economic growth by carrying out reform in institutional mechanism to ensure efficient supply of institutions. In this respect, reforms should be deepened on five systems and mechanisms such as administrative management, state-owned enterprises and monopolized industry, technical innovation, tax and finance, and related fundamental systems. The supply-side structural reform can also be promoted by expanding openness to the outside world.

At the 11^th Session of the Central Leading Group on Financial and Economic Affairs, decision-makers proposed that “while moderately expanding the aggregate market demand, we will deepen the supply-side structural reform, improve the quality and efficiency of supply system, enhance the engines for sustainable economic growth, and raise the overall level of China’s social productive force”. Later on, it was explicitly stated in the “13^th Five-Year Plan” outline issued by the State Council that “while carrying out the supply-side structural reform, we will increase efficient supply and meet efficient demand so as to accelerate formation of systems, mechanisms and pattern of new normal development”. In the next 5 years, therefore, the supply-side structural reform will be prioritized in the economic management of the Chinese government. However, here are some problems concerning the supply-side structural reform that need to be investigated: How to understand concepts of supply side and demand side? Why the supply-side structural reform is proposed at this stage? How to carry out and what are the contents of the supply-side structural reform? What should be considered and what measures will be taken during the supply-side structural reform? This is what will be covered in this book.

The current fiscal and taxation system affects the workforce, capital, land, optimal allocation, and technological innovation of energy and mineral resources. Moreover, the indirect tax structure and the misallocation of financial funds are not conducive to the optimization of the industrial structure; the weak tax regulation function is not conducive to the expansion of consumer demand; and the lagging reforms in the division of power, expenditure responsibility, and financial power are not conducive to the smooth progress of the reform in the fields related to land and household registration. In order to promote the structural reform of supply side, we should speed up the perfection of the preferential tax policy to encourage the improvement of human capital, optimize the investment direction and mode of financial capital, perfect the land use tax and fee policy, perfect the ecological tax system, increase the support of the inclusive fiscal and taxation policies for innovation, and strive to improve the total factor productivity. We also need to accelerate the perfection of fiscal and taxation policies that promote the optimization and upgrading of traditional industries and the development of strategic emerging industries and services, expand the consumption capacity of urban and rural residents and promote the upgrading of consumption, and promote the efficient combination of supply and demand. We will further straighten out the relationship between central and local financial powers and administrative powers and establish a system that is compatible with the central and local powers and responsibilities for expenditure, so as to create conditions for the smooth advancement of reforms in such areas as land and household registration, which are closely related to the factors of production.

Promoting the supply-side structural reform needs support of the financial system in many aspects, so the reform of the financial system should be accelerated as a content of the supply-side structural reform to meet the overall needs of the supply-side structural reform. At present, there are still a series of problems in China’s financial system. Banking and capital markets are constrained by institutional factors, resulting in low efficiency in allocation of financial resources. The mismatch of supply and demand structure of financial services, the insufficiency of financial support innovation, the transformation and upgrading of traditional industries, and the imperfection of monetary policy transmission and the financial supervision system have led to imperfection of the mechanism to prevent accumulation of financial risks, which is not conducive to the support of finance for the supply-side structural reform. According to the overall requirements of the supply-side structural reform and focusing on the problems mentioned above, we put forward the ideas of financial system reform under the supply-side structural reform as follows: exerting a decisive role of the market mechanism in allocation of financial resources, strengthening the ability of the financial service entity economy, promoting the reform of the banking system, relaxing access, strengthening competition and improving the efficiency of the allocation of credit resources, perfecting the capital market system, relaxing restriction, expanding the capacity and improving the efficiency, and increasing the proportion of direct financing. By developing diversified financing instruments, especially the direct financing instruments, the supply of financial services can be better adapted to the financing needs of the real economy. By perfecting the framework of monetary policy and the financial supervision system and maintaining the bottom line of non-systemic financial risk, the reform of the financial system can help remove excessive capacity and inventory, deleverage, reduce cost, promote adjustment of economic structure and cultivation of new impetus of economic growth, and provide strong support for the structural reform on the supply side. On this basis, specific policy recommendations are proposed as follows:

The supply-side structural reform is mainly to solve the five major problem in the current economic development (the slowing growth rate, the falling price of industrial products, the declining profit of entity enterprises, the falling growth rate of fiscal revenue, and the rising probability of economic risks) by increasing effective supply, reducing mismatch of supply structure, raising total factor productivity, and cultivating new power for medium- and long-term economic development. To solve the problem of mismatched supply structure, we need to promote transition of production factors from ineffective supply to effective supply. The financial system is the platform and channel of financial resources allocation, so its reform and improvement will be very necessary to promote optimization of capital elements’ allocation and form a system and policy environment supporting innovation. Therefore, we should focus on the problem of the current financial system not adapting to the demand of the supply-side structural reform, perfect its functions, improve the efficiency of financial resources allocation, strengthen its ability to serve the real economy, and provide support for advancing the structural reform of the supply side.

Constructing an open and efficient innovation system is an important part of the supply-side structural reform and plays an important role in de-capacity, de-stocking, de-leveraging, reducing cost, and improving weak points. To deepen the supply-side structural reform, we must speed up construction of the open and efficient innovation system. At present, China has created an innovation support system integrating government, enterprises, scientific research institutes, and universities, but there are still some problems such as underdeveloped core technologies, insufficient impetus for enterprise innovation, incompetent teams of the scientific and technological talents, and imperfect institutional mechanism; therefore, it is imperative to promote construction of the open and efficient innovation systems. For this purpose, we should perfect the incentive system, stimulate the vitality of all kinds of innovation subjects, promote innovation infrastructure, enhance the support of talent elements, and cultivate the social environment to encourage innovation and create a system arrangement which is favorable for innovation.

Deepening the reform of the state-owned enterprises (SOEs) and certain industries of a monopolistic nature is one of the key areas of the supply-side structural reform in China. Currently, there are a large number of problems to be resolved during development of the SOEs, such as the distribution of state-owned economy that needs to be optimized, the system of state-owned asset management that needs to be improved, the system of state-owned capital operation budget that remains imperfect, the system of modern enterprises that needs to be constructed, the industrial monopoly that obviously exists in SOEs including electricity, petroleum, and railways, and the fair play market environment that has not yet formed. Problems facing SOEs have originated from their institutional mechanisms while those facing certain industries of a monopolistic nature have arisen from administrative monopoly of SOEs, especially of the central enterprises (under direct control of the Central Government). Reforms of the SOEs and certain industries of a monopolistic nature in the future will focus on the following: (i) speeding up optimization of the state-owned economy distribution, perfecting regulatory systems of SOEs, and improving operating efficiency of the state-owned economy; (ii) deepening the reform of the state-owned property rights system, accelerating formulation of modern enterprise systems, facilitating de-administration of SOEs, removing administrative intervention in independent management of enterprises, separating public service institutions from government agencies, and isolating government social management functions from its state-owned asset owner’s functions to enhance the operating efficiency and innovative capacities of SOEs; (iii) reasonably defining the boundary between government and market, addressing such problems as “lopsided, absent and misplaced” government functions, removing inappropriate intervention of administrative privileges in certain industries of a monopolistic nature to break the interest pattern established by administrative privileges; (iv) conducting design of individual market reform schemes based on characteristics of certain industries with a monopolistic nature, perfecting the price-forming mechanism, optimizing the resource allocation mechanism through deregulating and strengthening supervision, and creating an open, fair, uniform, and high-efficiency modern regulatory system; and (v) opening market, breaking up monopoly, and bringing a competitive mechanism into market to form a market structure with workable competition and improve overall operating efficiency on the supply side.

As a backbone force in China’s socialist market economy, the state-owned economy plays a decisive role in the national economic system. The SOEs, especially the central enterprises, act as lifelines of China’s economy entitled to national preferential policy and favorable resource conditions, which therefore enables SOEs to dominate and monopolize the market more easily than private enterprises. While some private enterprises monopolize such areas as fuel gas, heat supply, and water supply, they seem far less dominant than the SOEs, especially the central enterprises, in acquiring administratively monopolized resources due to their institutional deficiencies. For this reason, the key areas of supply-side structural reform in China include deepening the reform of the SOEs, weakening direct government intervention in all industries, creating a fair play market environment, and enabling the market to play a decisive role in resources allocation. Chinese President Xi Jinping once pointed out clearly that we would unswervingly deepen the reform of SOEs and allow them to play leading roles in supply-side structural reform.

China’s opening up situation is currently facing great changes from both internal and external environments, such as the rising cost of domestic factors, gradual loss of traditional comparative advantages, weakening external demands, and increasingly severe trade frictions. Therefore, the supply-side structural reform is of great importance to China’s opening wider and changing from a big trading nation to a strong trading nation. In addition, opening wider, correcting factor market distortion, and rebuilding comparative advantages are important supporting factors for the supply-side structural reform. Under the new normal, opening up, transformation, and upgrading will be prioritized in cultivation of the innovation-based environment, reform of the factor market, experimental reform of the Free Trade Zones, and construction of the “Belt and Road”.

As China’s economic development enters the new normal at the present stage and in response to the new situation, new tasks, and new requirements of the supply-side structural reform, we will further promote a new round of high-level and all-dimensional opening up to facilitate the process of reform, innovation, and development.

This chapter clarifies the relationship between resource environment and supply-side reform from the theoretical basis of new economic growth theory, market failure, tragedy of the commons, externality theory, property right theory, and sustainable development, and makes clear that resource environment is the important content of factor supply, product supply, and system supply. At the same time, it analyzes the existing problems of resource environment from the supply-side perspective, and points out that institutional deficiency is currently the fundamental cause of the supply constraint problem of resource environment in China. On this basis, the chapter puts forward paths to optimize the allocation of resources, improve the efficiency of allocation of resources, increase the effective supply of eco-environmental products and services, and give full play to the constraint and backward action of resource environment supply-side reform. In addition, it puts forward some institutional innovation measures for the supply-side reform of resource environment, such as strengthening the state ownership of resource environment, perfecting the state management right of resource environment, and establishing the system of resource environment transaction.

In order to effectively solve the structural contradictions faced by the current economic operation of China, the Central Government has clearly put forward that it is necessary to strengthen the supply-side structural reform while moderately expanding the total demand. Resource environment, as the important content of factor supply, product supply, and system supply, plays an important role in the supply-side structural reform. Currently, the mechanism of marketization in China is not perfect, and the efficiency of resource allocation is not high. Economic development by sacrificing the ecological environment has become a weak point of economic and social development and constraints. In order to promote the supply-side reform, it is necessary to vigorously promote the innovation of resource environment system and bring the market into full play in the allocation of resources, increase the eco-environmental products and make up for the eco-environmental shortcomings, strengthen the hard constraints on environment, implement stricter access to environment, and promote industrial transformation and upgrading.

The following sections are included:

• Bibliography
• Index