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Sunday, November 06, 2022
Possible Future Direction of China's Economic Policies
He Jun

On November 4, the People's Daily published an article by the Chinese Vice Premier Liu He entitled "Integrating the Implementation of the Strategy of Expanding Domestic Demand and Deepening the Structural Reform of the Supply Side" (hereinafter referred to as "article"). The title of the article itself is from the report of the 20th National Congress that mentions, “pursuing high-quality development as our overarching task, we will make sure that our implementation of the strategy to expand domestic demand is integrated with our efforts to deepen supply-side structural reform; we will boost the dynamism and reliability of the domestic economy while engaging at a higher level in the global economy”.

The 20th National Congress has clarified the strategic direction of China's future development, and specific economic development policies need to be further implemented. From the end of the 20th National Congress to the "Two Sessions" next year, the market and Chinese society, in general, are concerned about the country’s economic policy issues. This article reviews the formation of the supply-side structural reform policy and discusses future economic policy issues. All of these have reference significance for the market.

The article mainly describes the transformation of the Chinese economic policy, from implementing supply-side structural reform to a combination of expanding domestic demand, as well as its deepening supply-side structural reform.

In 2008, in response to the impact of the international financial crisis, the Central Committee proposed expanding domestic demand as the fundamental means to maintain growth and issued a package plan with a large-scale increase in government. This was to stabilize market expectations and to make the economy quickly rebound. After the 18th National Congress, the main contradiction in China's economic operation changed from insufficient aggregate demand to the supply structural side being unable to adapt to changes in demand structure. In 2015, the Central Committee proposed to implement supply-side structural reforms and clarified the five key tasks of reducing overcapacity, destocking, deleveraging, reducing costs, and making up for shortcomings. Three years later, it further deepened supply-side structural reforms to promote the adjustment and optimization of deep-level relationships between finance and the real economy, real estate, and the real economy. Since 2020, in the face of the severe impact of the COVID-19 pandemic, Chinese President Xi Jinping pushed for deepened reforms in expanding domestic demand. China then accelerated the implementation of major projects, stabilizing residents' consumption and corporate investment, and maintaining the stable development of the economy.

In the process of the above-mentioned changes in economic policies, it can be seen that China's economy has transformed from high-speed growth in the past to medium-high-speed growth. In 2009, the country's economic growth rate was 9.3%. A decade later in 2019, before the outbreak of the COVID-19 pandemic, this was slowed to 6%. Affected by the pandemic, the economic growth rate was 2.3% in 2020, rebound from a low base to 8.1% in 2021, and slow down again to 3% in the first three quarters of 2022.

China’s Year-on-Year GDP Growth Rate in Q3, 2001 to 2022

Source: National Bureau of Statistics, chart plotted by ANBOUND

What could be the reasons for the sustained and significant slowdown in China's economic growth? This is related to a series of changes both on the international scene, and within China itself. We are witnessing major and rapid changes in the world unseen in a century. There is the far-reaching impact of the pandemic, the weak recovery of the global economy, the high level of inflation, the major developed economies adjusting their macro policies significantly, and the possible further fluctuating international demand which will have a major impact on the world’s aggregate supply and demand balance. China's economy has recently faced triple pressures of shrinking demand, supply shocks, and weakening expectations. In addition, risk factors have risen and the country’s population aging has accelerated. Furthermore, its traditional advantages such as labor and land have weakened, whereas resource and environmental constraints have been tightened, with weaker technological innovation capabilities. Hence, the country’s improvement of total factor productivity has been constrained, making it urgent for both supply and demand sides to expand effective demand.

In response to this new situation, since 2020, the Party Central Committee has proposed to speed up the construction of a new development pattern with the domestic cycle as the main body and the domestic and international dual cycles mutually promoting each other, and firmly placing the foundation of development on the basis of its own strength. This requires the country to make overall plans to expand domestic demand and optimize supply, give full play to the advantages of its huge market, improve the adaptability of the supply system to domestic demand, open up the economic cycle, and promote the benign interaction between supply and demand.

With these changes, how will China's economic policy be in the future? Liu’s article believes that after China makes itself a “well-off society”, the problem of "have” and “have no” in most sectors will be fundamentally resolved, yet the issue of quality will become more prominent. It is therefore necessary for the country to solve such a contradiction through high-quality development. China’s massive market should be an advantage that can be taken, according to the article. This requires strategies for expanding domestic demand, deepening the supply-side structural reform, and promoting the effective improvement of the economy and rational quantity growth. All these are reflected in the fact that China has shifted from a "high-speed growth stage" to a "high-quality development stage".

The article addresses several notable issues in regard to the realization of the realize the integration of expanding demand strategy and deepening supply-side structural reform:

1. It would be crucial for China to adhere to economic construction as its main focus. The country will also need to deepen reform and opening up, as well as identify the organic integration point between the implementation of the strategy of expanding domestic demand and the deepening of supply-side structural reform. There have been doubts in the market if these two points would be adhered to by the Chinese authority, and the article answers both with an affirmative “yes”.

2. The strategy of expanding domestic demand will need to meet the individualized, diversified, and escalating demands of the people. There should be investments with reasonable returns, consumption based on income, and demand constrained by principal and debt. In addition, the demand needs to be sustainable. This means that the "effective demand" under high-quality development has its own thresholds and constraints.

3. The factors restricting China's economic development exist on both sides of supply and demand, but the main aspect of the contradiction lies on the supply side. This is shown by the fact that the supply structure cannot adapt to the changes in the demand structure. To deepen the supply-side structural reform, the focus should be on improving the quality and efficiency of the supply system, as well as the adaptability of the supply structure to effective demand. It is also necessary to avoid outdated production capacity and products that do not meet the development direction and market demand, as this would in a waste of social resources. Notably, the quality supply referred to here is related to innovation to break through the supply constraints, as well as meeting and even creating the demand with high-quality and effective supply.

4. China's massive market is the foundation for the expansion of its domestic demand. It has a population of more than 1.4 billion and a middle-income group of more than 400 million, making it the most potential market in the world. Liu’s article believes that the market is the scarcest resource in the world. The large Chinese market has brought significant advantages of economies of scale, innovation, and development and shock resistance to the country's economic development.

5. The structural change that the Chinese economy is going through is a complex process of market-based exploration of trials and errors. The article noted that the entrepreneurial spirit must be promoted, and the vitality and creativity of enterprises have to be stimulated. It is also indispensable to deepen the reform of state-owned assets and state-owned enterprises, and speed up the optimization of the layout and structural adjustment of the state-owned economy. At the same time, it is also necessary to optimize the development environment of private enterprises and promote the development and growth of the private economy. In sum, there is a need to regulate and guide the healthy development of capital in accordance with the law.

6. The article suggests that the process of modernization will inevitably be accompanied by profound adjustments in the urban and rural regional structure and great changes in the spatial pattern of the country, which is a process of releasing huge demand and creating huge supply. Hence, promoting urban-rural integration and coordinating regional development would be quite important.

Final analysis conclusion:

The article by Vice Premier Liu He can be considered a window to observe China's future economic policies. After the general direction of the 20th National Congress has been determined, the country’s future economic policies will develop and continue along the existing policy trajectory.

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