Correctly Understanding and Effectively Advancing Supply-Side Structural Reform

Not long ago, General Secretary Xi Jinping emphasized at the 13th meeting of the Central Leading Group for Financial and Economic Affairs that advancing supply-side structural reform is a major decision made on the basis of a comprehensive analysis of the world economic situation and the new normal of China's economic development. Today, I would like to take this opportunity to share some of my preliminary personal thoughts on how to correctly understand supply-side structural reform, how to grasp its key points, and how to ensure its effective advancement, for everyone's reference.

　　I. How to Understand the Connotations of Supply-Side Structural Reform

As you all know, there is now a great deal of discussion in society about supply-side structural reform. But what exactly "supply-side structural reform" is, and what it is not, seems not to have been stated very clearly, and some interpretations are even misreadings. So what is the true meaning of supply-side structural reform? I think we need to grasp at least the following "two is and three is not":

First, the essence of supply-side structural reform is reform. Supply-side structural reform is, first and foremost, reform, and its object is the institutional mechanisms - this is the essence of supply-side structural reform. To discuss supply-side structural reform while departing from this "reform" essence would be to deviate from its original meaning. In fact, merely from the perspective of Chinese grammar, whether we say "supply-side structural reform" or "supply-side reform," both are modifier-head structure phrases, with "supply-side" as the modifier and "reform" as the head word; clearly "reform" is the central meaning. As the General Secretary has pointed out, the essential attribute of supply-side structural reform is deepening reform. Supply-side structural reform is about changing certain old systems on China's supply side that hinder the supply structure from adapting to changes in demand. Therefore, although "three cuts, one reduction, one improvement" - that is, cutting overcapacity, reducing excess housing inventory, and deleveraging, lowering costs, and shoring up weaknesses - are major tasks of "supply-side structural reform," they are not reform itself. The key is to see who does it and in what manner. The object of reform is the system, not the problem or the task itself.

Second, supply-side structural reform is structural reform. The General Secretary emphasized that the supply-side reform we propose is, in full, "supply-side structural reform," and it may also be abbreviated as "supply-side reform," but the three characters "structural" must not be forgotten. In fact, in my understanding, supply-side structural reform is structural reform, and without the essence of "structural," discussing supply-side reform is meaningless. The term structural reform actually originated in the West, emphasizing reform of institutional problems that produce structural contradictions, including the relationship between government and society, government and market, and government and enterprises - for example, Europe's labor market and welfare system reforms. In China, structural contradictions are more prominent, especially the serious problem of overcapacity. The emergence of this problem has special institutional causes, mainly the distorted relationship between government and enterprises. In fact, the supply side was originally not a problem; the reason it has become one is that there is a "visible hand" playing a counterproductive role. Supply-side structural reform is about straightening out these relationships, letting the market truly play a decisive role in resource allocation, and letting "zombie enterprises" that should be laid to rest be "laid to rest in peace."

Third, supply-side structural reform is not equal to the propositions of supply-side economics. The General Secretary emphasized that the supply-side structural reform we speak of is not the same thing as the supply-side school of Western economics, and supply-side structural reform must not be seen as a replica of Western supply-side economics. As you all know, supply-side economics was a school of economics that rose in the United States in the 1970s. Supply-side economics holds that the growth of production is determined by the supply and effective utilization of factors of production such as labor and capital. Supply-side economics strongly advocates large-scale tax cuts, believing that tax cuts can stimulate people to work more. Although supply-side structural reform also includes the requirement of reducing taxes and fees to lighten the burden on enterprises, not only is the nature of the reform fundamentally different from the propositions of supply-side economics, but the scope of the reform also far exceeds the propositions of supply-side economics.

Fourth, supply-side structural reform is not equal to structural adjustment. There is now a misunderstanding that supply-side structural reform is structural adjustment. In fact, although supply-side structural reform is related to structural problems, it is not equivalent to structural adjustment either in connotation or in specific measures. In the past, structural adjustment usually employed three means - economic, legal, and administrative - and more often used administrative means. Clearly, although this round of supply-side structural reform does not exclude necessary administrative and legal means, such as reducing subsidies for losses, stopping loans to zombie enterprises, and implementing enterprise bankruptcy in accordance with the law, unlike before, the adjustment of structure will mainly be achieved through reform methods, solving problems starting from institutional mechanisms. Supply-side structural reform is precisely a proactive choice made after rethinking the traditional approach to structural adjustment.

Fifth, supply-side structural reform is not about creating a new planned economy. There is now a view in society that advancing supply-side structural reform is about creating a new "planned economy." This is clearly a misunderstanding. The key to supply-side structural reform is to further stimulate the vitality of market entities and better give play to the decisive role of the market in resource allocation. This is the improvement of the socialist market economy system, and definitely not a return to the old path of the planned economy. It was precisely because the role of market mechanisms was insufficiently brought into play in the past and government intervention was excessive that the market could not clear in a timely manner, giving rise to various structural contradictions. Although supply-side structural reform may have various different plans, I believe that such plans, even if labeled "plans," are not the planned economy in its original sense. What is needed now is institutional reform; if we only adjust structure without reforming the system, we will inevitably fall into the strange cycle of "another adjustment every few years." This is precisely the problem that supply-side structural reform is meant to solve.

　　II. How to Grasp the Key Tasks of Supply-Side Structural Reform

Advancing supply-side structural reform is the main line of China's economic work at present and for a period to come. The tasks of supply-side structural reform are arduous and heavy, and can be simply summarized as: one core, three aspects, and five key points.

First, the one core is handling the relationship between government and market. This is the core issue of economic system reform and also the fundamental task of supply-side structural reform, with the aim of enabling the market to play a decisive role in resource allocation and better giving play to the role of government. Supply-side structural reform is about starting from the supply side, advancing institutional reform in response to major structural problems, breaking down all institutional mechanisms that hinder the development of social productive forces, and accelerating the transition from the traditional planned economy system to the market economy system.

Second, from a long-term perspective, it is about establishing and improving a supply system that adapts to changes in market demand. This system includes three aspects: micro-level entities, the market system, and market management. Overall, it is about improving the market environment and stimulating the vitality of enterprises and the potential of consumers. According to the spirit of the Third Plenum, the reform directions for these three aspects are: First, protect the property rights and legitimate interests of economies under all forms of ownership equally in accordance with the law, ensure that economies under all forms of ownership use factors of production equally in accordance with the law and participate in market competition openly, fairly, and justly, and develop a mixed-ownership economy. Second, build a unified, open, competitive, and orderly market system, focus on removing market barriers, break industry monopolies and local protection, and improve the efficiency and fairness of resource allocation. Third, focus on solving the problems of excessive government intervention and inadequate supervision, substantially reduce the government's direct allocation of resources, and promote the allocation of resources relying on market rules, market prices, and market competition, so as to maximize benefits and optimize efficiency.

Finally, from a near-term perspective, it is about fully implementing the five key tasks of "cutting overcapacity, reducing excess housing inventory, deleveraging, lowering costs, and shoring up weaknesses." First, actively and steadily resolve overcapacity. Overcapacity and "zombie enterprises" should be handled in a categorized and orderly manner according to local conditions, using methods in which enterprises are the main actors, the government promotes, the market guides, and disposal is carried out in accordance with the law. Second, reduce real estate inventory. By accelerating the urbanization of migrant workers, expanding effective demand, opening up the supply-demand channel, digesting inventory, and stabilizing the real estate market. Third, prevent and resolve financial risks. Credit defaults should be handled in accordance with the law, risks from local government debt should be effectively resolved, various financing activities should be regulated, and risk cases should be properly handled. Fourth, help enterprises lower costs. This includes lowering institutional transaction costs, enterprise tax and fee burdens, social insurance contributions, enterprise financial costs, electricity prices, and logistics costs. Fifth, expand effective supply. Fight the battle against poverty, support enterprise technological transformation and equipment upgrading, cultivate and develop new industries, new products, and new business forms, and shore up weaknesses in soft and hard infrastructure, human capital investment, and so on.

The core of these five tasks is deepening reform. To cut overcapacity, it is necessary to handle "zombie enterprises" - those that should be "weaned" should be "weaned," and those whose loans should be cut off should have their loans cut off. To reduce inventory, it is necessary to intensify reform of the household registration system and establish and improve supporting systems such as fiscal, tax, and land systems for migrant workers moving into cities. To deleverage, it is necessary to break rigid repayment guarantees in an orderly manner and advance financial reform. To lower costs, it is necessary to advance reform of taxation, the social security system, monopoly industries, and the transformation of government functions, bring down the overall tax burden, eliminate unreasonable charges, and reduce administrative approvals. To shore up weaknesses, it is necessary to advance targeted poverty alleviation and targeted poverty eradication, improve the science and technology innovation system, advance the development of the ecological civilization system, improve infrastructure investment and financing mechanisms, and solve the institutional problem of "where the money comes from and where it goes."

　　III. How to Ensure the Effective Advancement of Supply-Side Structural Reform

The General Secretary emphasized that supply-side structural reform concerns the overall situation and the long term, and must be earnestly carried out. At a time when downward pressure on the economy remains relatively large, some real-economy enterprises still face difficulties in production and operation, and market risk points are increasing, how to ensure the effective advancement of supply-side structural reform - the Central Economic Work Conference proposed implementing five major policies that mutually coordinate with one another, and the meeting of the Political Bureau of the CPC Central Committee held on April 29 further clarified the relevant policy guidelines. In my understanding, this mainly requires achieving "three stabilities and two mobilizations."

First, stabilize the macroeconomy. This means creating a stable macroeconomic environment for structural reform. To this end, it is necessary to persist in appropriately expanding aggregate demand, implement a proactive fiscal policy and a prudent monetary policy, ensure that the proactive fiscal policy is truly proactive and the prudent monetary policy is truly prudent, and focus on grasping the key points, pace, and intensity. It is necessary to maintain resolve, avoid forcibly pushing economic growth by adding leverage, and ensure that policies already set by the central government are not distorted or deformed.

Second, stabilize market operations. This mainly means maintaining the stability of the financial market and preventing systemic and regional financial risks. The central government has already made clear the policy orientation for the stock market, the foreign exchange market, and the real estate market - that is, they should return to their respective functional positions, respect their respective development laws, and must not simply be used as a means to maintain growth. It is necessary to maintain the healthy development of the stock market, fully give play to the regulatory role of market mechanisms, strengthen basic institutional development, strengthen market supervision, and protect investors' rights and interests. It is necessary to maintain the basic stability of the RMB exchange rate and gradually form an exchange rate operating mechanism based on market supply and demand, with two-way floating and flexibility. It is necessary to maintain the stability of the real estate market, digest real estate inventory in an orderly manner, focus on solving regional and structural problems, and implement differentiated regulatory policies.

Third, stabilize social employment. In the process of cutting overcapacity, the problem of layoffs and unemployment must be properly handled: some workers need to be transferred to new posts, some need help solving difficulties in daily life, some employees of bankrupt enterprises need to be directly included in the minimum living guarantee, and some need to receive training to improve their reemployment ability. At the same time, social policies must provide a safety net, better give play to the role of social security as a stabilizer, focus on providing a bottom line, guarantee the basic livelihood of the people, and guarantee basic public services.

Fourth, mobilize the enthusiasm of entrepreneurs. In supply-side structural reform, whether it is the disposal of "zombie enterprises," the digestion of real estate inventory, or the increase of effective supply, none can be achieved without the proactive participation of entrepreneurs. It is necessary to uphold the basic economic system, guide social psychological expectations well, attach importance to the protection of property rights and intellectual property rights, improve the commercial legal environment, focus on creating a good market atmosphere that supports business, reassures business, and benefits business, and effectively give play to the important role of entrepreneurs.

Fifth, mobilize the enthusiasm of cadres at all levels. At present, understanding of advancing supply-side structural reform is constantly improving in all quarters, relevant departments have already introduced some policy measures, and many regions have studied and formulated comprehensive plans and special plans. The state will also formulate and introduce a series of policy measures and reform plans. Whether in the formulation or implementation of policies and plans, the sense of responsibility and action of cadres at all levels is required. Only by fully mobilizing the enthusiasm of the broad ranks of cadres, especially leading cadres, can we ensure that all measures of supply-side structural reform are put into practice and achieve real results.

In short, advancing supply-side structural reform is a major innovation for adapting to and leading the new normal of economic development. We must deeply understand its historical background, accurately grasp its basic requirements, integrate them with our own work, and proactively devote ourselves to this work, so as to promote the sustained and healthy development of the economy and society.