Demand-side reform need of the hour
China Daily

Containers are unloaded at Qingdao Port in Shandong province in March. [Photo by Yu Fangping/For China Daily]

At a recent high-level meeting on next year's economic plans, the top authorities said that while adhering to supply-side structural reform, the country will pay greater attention to demand-side reform in order to create a higher level dynamic balance between demand and supply. One in which demand directs supply and supply creates demand, thus raising the national economy's overall efficiency.

To cope with the impact of COVID-19, the country's priority has to be to stabilize enterprises' production and maintain employment by supporting the supply side and increasing investment. This, along with the strategy of expanding domestic demand by increasing consumption subsidies, reflects the policymakers' emergency response.

For a long time, the country's decision-makers have dealt with downward economic pressures by increasing investment to stabilize the supply side and ensure employment. However, an ever-increasing proportion of government investment has gone into real estate investment, leading to ever-rising housing prices, and ever-increasing government and household leverage ratios.

At the same time, consumption's growth rate has gradually slowed down, as investment has a declining pull effect, and excess capacity as a result of extensive investment has led to a lower industrial profit margin leading to slower income rises for employees. Increased household debts as a result of rising asset prices and ever-increasing commercial operation costs because of rising rents have put pressure on both supply and consumption.

Increased government investment and consumption essentially depend on credit expansion. However, cyclical easing policies also encourage some enterprises to borrow money to operate, rather than relying on reform and innovation. This stimulates asset price rises and increases the rich-poor gap. Increased government debts will also restrict government spending.

So, the country needs to reassess the traditional way of increasing investment through credit expansion to stabilize the supply side and focus more on the demand side. To maintain the steady growth of investment, the country should give more consideration to expanding household consumption and lowering the proportion of government investment to consumption, which first requires a better income distribution mechanism.

The country should raise the share of laborers' income, improve farmers' social security coverage, change the urban-rural dual structure, and further promote the revitalization of rural areas, the reform of the household registration system, and equalize distribution of public services, to narrow the income divide. It should continue to promote antimonopoly and anti-corruption efforts, lower distortedly high incomes in some monopolized industries, increase asset taxes, and avoid excessive securitization in the service industry.

The country should vigorously improve the quality and efficiency of production through supply-side structural reform and its innovation strategy, reform the income distribution system so as to ultimately promote consumption, drive production, and achieve sustainable and high-quality development.