On Advancing the Supply-Side Structural Reform
Author： Source： Date：2017-09-01
I would like to talk about a few viewpoints of minesome of my viewpoints on the supply-side structural reform. The supply-side reform is dedicated to solving major structural problems by pushing forward major reform programs from the supply-side. It is of great strategic significance for China to transform the economic growth pattern and realize the sustainable and healthy development of the national economy during the “13th Five-Year Plan” period. Featuring precise exertion of strength and correct direction, the reform is aimed at resolving prominent contradictions and outstanding problems currently existing in the operations of key fields, key industries and key enterprises, focusing on the five great tasks of “cutting over-capacity, de-stocking, de-leveraging, reducing cost and shoring up weak spots”, and promoting transformation, upgrading and structural optimization through making big increments and shoring up weak spots.
However, the problem is that currently the progress of advancing the supply-side reform has been far worse than expected. There are difficulties in implementing and executing the reform deployment, leading to the phenomena of “the central government finds it pressing but the local government acts unhurriedly” and “local government feels it pressing but the enterprises act unhurriedly” in practical work. There are three main reasons for the slow progress of supply-side reform: First, a consensus on many major issues of the reform has not yet been reached; second, the reform objectives need to be further defined; third, the enthusiasm of local government and enterprises has not yet been fully mobilized.
To this end, advancing the supply-side reform mainly requires the following work to be done:
Actively develop a consensus on the reform. One of the most important successful experience of the economic reform in the 1990s is centering on the reform of the state-owned enterprises, keeping the leadership and the rank and file with one mind and deliberating on the reform and change. By contrast, a consensus has not yet been reached on multiple major theoretical and practical issues concerning the current reform, leading to the difficulties in gathering strength and promoting the reform.
First and foremost, develop a consensus on the deep-seated causes of excess capacity. For a long time, China’s economic growth has been driven mainly by investment and resources, resulting in distorted investment incentives of the government and enterprise, concentrated influx of massive state-owned capital to basic and general competitive areas. In the large-scale stimulus package after the global financial crisis in 2008, state-owned enterprises benefited the most and obtained the most funds. Due to lack of self-restraint and impetus for innovation, and undue pursuit of scale, as well as blind repeated construction, some of the state-owned enterprises appear continuous deteriorated economic efficiency. The state-owned “zombie enterprises” characterized by low efficiency and low output exist in various industries. Studies have shown that in China’s industrial sector, the percentage of “zombie enterprises” among the state-owned and collectively-owned enterprises is the highest. Heavily pressed by the industrial excess capacity, a large number of state-owned enterprises deployed in the basic, resource-intensive and heavy chemical industries are confronted with serious production and operation crises.
Second, foster a consensus on how to adjust the layout of state-owned capital. The reform of state-owned enterprises and capital is the core of supply-side reform. Major problems currently existing in the layout of state-owned capital include: the chronic ills of excessively wide and discrete layout have not been fundamentally changed; the policy functions of public service and industry leading have not been effectively exerted; and the state-owned and private capital scramble for profits in general competitive fields such as real estate. Since the beginning of this year, the sharp rise of real estate prices has aroused common concern. Some state-owned enterprises have played an important role in promoting the current round of real estate price rise, with the result that new top real estate bidders (land king) have emerged repeatedly. According to the state-owned enterprises economic performance in the first half of 2016 released by the Asset Management Unit of the Ministry of Finance of the People’s Republic of China, the income and profits of state-owned enterprises in the first half of the year continued to decline, while pharmaceuticals, construction and real estate industries achieved an year-on-year increase of profits by a large margin. The state-owned economy should give full play to its leading role in the basic and public welfare fields and withdraw from the general competitive fields. SASAC (State-owned Assets Supervision and Administration Commission of the State Council) has long since made a clear requirement of asking the central enterprises to withdraw from the real estate industry, to which the commitments must be honored and the requests must be implemented.
Objectives of the supply-side reform need to be further clarified. The supply-side reform should be focused on innovation, structure adjustment and promotion of economic transformation, but this is not clearly reflected in the five great tasks of “cutting over-capacity, de-stocking, de-leveraging, reducing cost and shoring up weak spots”. Concerning the reform of state-owned enterprises, the relationships between the objectives of “making them stronger, better and bigger” should be further rationalized, because what’s big is not necessarily strong, what’s strong is not necessarily excellent, and what’s excellent is not necessarily big. The larger the scale of enterprises, the higher the status, and perhaps the stronger impulse of blind expansion, leading to decision-making misplay, cost escalation, benefits decline. Therefore, the reform of state-owned enterprises and capital should give priority to “making them better”, committed to improving the efficiency and competitiveness of state-owned enterprises. The main task of the state-owned enterprise restructuring fund is to support state-owned enterprises in key industries to implement industrial consolidation and specialized restructuring. For this purpose, government funds should be used to widely absorb and involve social and private capital in the transformation, upgrading and improvement of performance of state-owned enterprises.
The government has to continue to streamline administration and delegate more powers to lower levels. Delegating more powers is not “separation of powers”. It is not to re-divide the powers between the central authorities and local governments, but to try to narrow down the government’s allocation of resources so that the market plays a decisive role. Under the leadership of government departments, the reform of state-owned enterprises and capital has taken on the phenomena of using administrative measures to mediate in the restructuring, or even “getting listed first and then seeking consolidation”. These practices obviously fail to give full play to the decisive role of the market. Not only do they hardly achieve the desired effect of alliance between strong enterprises, but also possibly drag down excellent enterprises, causing adverse impacts on the overall reform.
Activate private capital, and involve it in supply-side reform. The basic economic system of keeping public ownership as the mainstay of the economy and allowing diverse forms of ownership to develop side by side is an important pillar of the socialist system with Chinese characteristics, and is also the foundation of the socialist market economic system. Over the past decade or so, the government has introduced a number of policies encouraging private investment and the development of private enterprises, but many of them are temporary and partly preferential measures, and some policies failed to be effectively implemented. In practice, for one thing, the old problems of difficult and costly financing for the private economy have not been fundamentally resolved. For another, this year the rapid decline in private investment has drawn general concern. According to the data released by the National Bureau of Statistics, between January and June 2016, the private investment in fixed assets registered 15.8797 trillion yuan, a nominal growth of 2.8%; in Northeast China, the growth rate of private investment fell by 31.9%, among which the private investment in Liaoning between January and June witnessed a negative growth of 58.1%. To activate private capital to participate in the supply-side reform, the key is to offer private capital with a stage for free development and provide a stable, transparent and predictable market environment and legal environment. To this end, it is necessary to break the monopoly in energy, transport, telecommunications, road networks and other industries and liberalize access restrictions for private capital, and avoid re-setting the thresholds. For instance, in the beginning of the year, China Securities Regulatory Commission (CSRC) required senior executives of private equity fund managers to pass the fund practitioners’ accreditation examination, which in fact added to the practitioner access threshold and should be canceled. Besides, it is necessary to abolish the discriminatory provisions against private enterprises and private capital, so that state-owned enterprises and private enterprises, state-owned capital and private capital can compete from the same starting line. For instance, the requirements of the authorities in charge of industry and commerce administration stipulate that state-owned capital must be available when setting up private equity fund, otherwise the application would not be approved. Similar provisions should be abolished.
Pay particular attention to well handling the placement of workers in the process of clearing and disposing “zombie enterprises”. Eliminating over-capacity and clearing up “zombie enterprises” are important parts of the supply-side reform. It is estimated that the process of the supply-side reform is expected to result in transfer of nearly 10 million labor force, thus exerting enormous pressure on the employment, social security, both sides of labor supply and demand. Therefore, “reducing overcapacity” cannot cut the employment of the workers. Instead, the problem of staff placement should be properly handled: on the one hand, the government should take the initiative to provide the catch-all guarantee, financial policy support and re-employment services; on the other hand, the enterprises should earnestly fulfill their own social responsibilities, and actively create conditions for the placement and re-employment of the workers.
Establish a fault-tolerant mechanism and encourage people to be bold in making attempts and daring in breaking through, allow mistakes in the reform and form joint efforts of all parties. The Central Economic Work Conference pointed out that pushing forward the supply-side structural reform is a major innovation to adapt to and lead the new normal economic development, an initiative choice to adapt to the new situations of comprehensive national strength in the wake of the international financial crisis, and an inevitable requirement of adapting to the new normal of China’s economic development. Here, a series of “new” indicates that the supply-side reform is groundbreaking and exploratory, and that its risks and challenges should not be overlooked. Therefore, advancing the supply-side reform requires creating a relaxed atmosphere for fault-tolerance and trial and error. If business managers in the reform make mistakes while not corrupt, we should allow them to make corrections instead of going too far. In this way, we can fully mobilize the subjective initiative of local governments and enterprises, increase their responsibilities and accountability to energetically carry out the reform.
We firmly believe that the 19th National Congress of CPC to be held next year will, on the basis of continuing to adhere to the principles of strictly governing the Party and fighting corruption, shift the focus of work of the whole party to seek development wholeheartedly, continue to push forward the reform in an all-round way, go all out for economic construction, vigorously promote and implement overall reform, and lead and unite the whole nation to work hard for achieving the “Two Centenary Goals”!
However, the problem is that currently the progress of advancing the supply-side reform has been far worse than expected. There are difficulties in implementing and executing the reform deployment, leading to the phenomena of “the central government finds it pressing but the local government acts unhurriedly” and “local government feels it pressing but the enterprises act unhurriedly” in practical work. There are three main reasons for the slow progress of supply-side reform: First, a consensus on many major issues of the reform has not yet been reached; second, the reform objectives need to be further defined; third, the enthusiasm of local government and enterprises has not yet been fully mobilized.
To this end, advancing the supply-side reform mainly requires the following work to be done:
Actively develop a consensus on the reform. One of the most important successful experience of the economic reform in the 1990s is centering on the reform of the state-owned enterprises, keeping the leadership and the rank and file with one mind and deliberating on the reform and change. By contrast, a consensus has not yet been reached on multiple major theoretical and practical issues concerning the current reform, leading to the difficulties in gathering strength and promoting the reform.
First and foremost, develop a consensus on the deep-seated causes of excess capacity. For a long time, China’s economic growth has been driven mainly by investment and resources, resulting in distorted investment incentives of the government and enterprise, concentrated influx of massive state-owned capital to basic and general competitive areas. In the large-scale stimulus package after the global financial crisis in 2008, state-owned enterprises benefited the most and obtained the most funds. Due to lack of self-restraint and impetus for innovation, and undue pursuit of scale, as well as blind repeated construction, some of the state-owned enterprises appear continuous deteriorated economic efficiency. The state-owned “zombie enterprises” characterized by low efficiency and low output exist in various industries. Studies have shown that in China’s industrial sector, the percentage of “zombie enterprises” among the state-owned and collectively-owned enterprises is the highest. Heavily pressed by the industrial excess capacity, a large number of state-owned enterprises deployed in the basic, resource-intensive and heavy chemical industries are confronted with serious production and operation crises.
Second, foster a consensus on how to adjust the layout of state-owned capital. The reform of state-owned enterprises and capital is the core of supply-side reform. Major problems currently existing in the layout of state-owned capital include: the chronic ills of excessively wide and discrete layout have not been fundamentally changed; the policy functions of public service and industry leading have not been effectively exerted; and the state-owned and private capital scramble for profits in general competitive fields such as real estate. Since the beginning of this year, the sharp rise of real estate prices has aroused common concern. Some state-owned enterprises have played an important role in promoting the current round of real estate price rise, with the result that new top real estate bidders (land king) have emerged repeatedly. According to the state-owned enterprises economic performance in the first half of 2016 released by the Asset Management Unit of the Ministry of Finance of the People’s Republic of China, the income and profits of state-owned enterprises in the first half of the year continued to decline, while pharmaceuticals, construction and real estate industries achieved an year-on-year increase of profits by a large margin. The state-owned economy should give full play to its leading role in the basic and public welfare fields and withdraw from the general competitive fields. SASAC (State-owned Assets Supervision and Administration Commission of the State Council) has long since made a clear requirement of asking the central enterprises to withdraw from the real estate industry, to which the commitments must be honored and the requests must be implemented.
Objectives of the supply-side reform need to be further clarified. The supply-side reform should be focused on innovation, structure adjustment and promotion of economic transformation, but this is not clearly reflected in the five great tasks of “cutting over-capacity, de-stocking, de-leveraging, reducing cost and shoring up weak spots”. Concerning the reform of state-owned enterprises, the relationships between the objectives of “making them stronger, better and bigger” should be further rationalized, because what’s big is not necessarily strong, what’s strong is not necessarily excellent, and what’s excellent is not necessarily big. The larger the scale of enterprises, the higher the status, and perhaps the stronger impulse of blind expansion, leading to decision-making misplay, cost escalation, benefits decline. Therefore, the reform of state-owned enterprises and capital should give priority to “making them better”, committed to improving the efficiency and competitiveness of state-owned enterprises. The main task of the state-owned enterprise restructuring fund is to support state-owned enterprises in key industries to implement industrial consolidation and specialized restructuring. For this purpose, government funds should be used to widely absorb and involve social and private capital in the transformation, upgrading and improvement of performance of state-owned enterprises.
The government has to continue to streamline administration and delegate more powers to lower levels. Delegating more powers is not “separation of powers”. It is not to re-divide the powers between the central authorities and local governments, but to try to narrow down the government’s allocation of resources so that the market plays a decisive role. Under the leadership of government departments, the reform of state-owned enterprises and capital has taken on the phenomena of using administrative measures to mediate in the restructuring, or even “getting listed first and then seeking consolidation”. These practices obviously fail to give full play to the decisive role of the market. Not only do they hardly achieve the desired effect of alliance between strong enterprises, but also possibly drag down excellent enterprises, causing adverse impacts on the overall reform.
Activate private capital, and involve it in supply-side reform. The basic economic system of keeping public ownership as the mainstay of the economy and allowing diverse forms of ownership to develop side by side is an important pillar of the socialist system with Chinese characteristics, and is also the foundation of the socialist market economic system. Over the past decade or so, the government has introduced a number of policies encouraging private investment and the development of private enterprises, but many of them are temporary and partly preferential measures, and some policies failed to be effectively implemented. In practice, for one thing, the old problems of difficult and costly financing for the private economy have not been fundamentally resolved. For another, this year the rapid decline in private investment has drawn general concern. According to the data released by the National Bureau of Statistics, between January and June 2016, the private investment in fixed assets registered 15.8797 trillion yuan, a nominal growth of 2.8%; in Northeast China, the growth rate of private investment fell by 31.9%, among which the private investment in Liaoning between January and June witnessed a negative growth of 58.1%. To activate private capital to participate in the supply-side reform, the key is to offer private capital with a stage for free development and provide a stable, transparent and predictable market environment and legal environment. To this end, it is necessary to break the monopoly in energy, transport, telecommunications, road networks and other industries and liberalize access restrictions for private capital, and avoid re-setting the thresholds. For instance, in the beginning of the year, China Securities Regulatory Commission (CSRC) required senior executives of private equity fund managers to pass the fund practitioners’ accreditation examination, which in fact added to the practitioner access threshold and should be canceled. Besides, it is necessary to abolish the discriminatory provisions against private enterprises and private capital, so that state-owned enterprises and private enterprises, state-owned capital and private capital can compete from the same starting line. For instance, the requirements of the authorities in charge of industry and commerce administration stipulate that state-owned capital must be available when setting up private equity fund, otherwise the application would not be approved. Similar provisions should be abolished.
Pay particular attention to well handling the placement of workers in the process of clearing and disposing “zombie enterprises”. Eliminating over-capacity and clearing up “zombie enterprises” are important parts of the supply-side reform. It is estimated that the process of the supply-side reform is expected to result in transfer of nearly 10 million labor force, thus exerting enormous pressure on the employment, social security, both sides of labor supply and demand. Therefore, “reducing overcapacity” cannot cut the employment of the workers. Instead, the problem of staff placement should be properly handled: on the one hand, the government should take the initiative to provide the catch-all guarantee, financial policy support and re-employment services; on the other hand, the enterprises should earnestly fulfill their own social responsibilities, and actively create conditions for the placement and re-employment of the workers.
Establish a fault-tolerant mechanism and encourage people to be bold in making attempts and daring in breaking through, allow mistakes in the reform and form joint efforts of all parties. The Central Economic Work Conference pointed out that pushing forward the supply-side structural reform is a major innovation to adapt to and lead the new normal economic development, an initiative choice to adapt to the new situations of comprehensive national strength in the wake of the international financial crisis, and an inevitable requirement of adapting to the new normal of China’s economic development. Here, a series of “new” indicates that the supply-side reform is groundbreaking and exploratory, and that its risks and challenges should not be overlooked. Therefore, advancing the supply-side reform requires creating a relaxed atmosphere for fault-tolerance and trial and error. If business managers in the reform make mistakes while not corrupt, we should allow them to make corrections instead of going too far. In this way, we can fully mobilize the subjective initiative of local governments and enterprises, increase their responsibilities and accountability to energetically carry out the reform.
We firmly believe that the 19th National Congress of CPC to be held next year will, on the basis of continuing to adhere to the principles of strictly governing the Party and fighting corruption, shift the focus of work of the whole party to seek development wholeheartedly, continue to push forward the reform in an all-round way, go all out for economic construction, vigorously promote and implement overall reform, and lead and unite the whole nation to work hard for achieving the “Two Centenary Goals”!
