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A Supply and Demand Balancing Act
 NO. 49 DECEMBER 3, 2015

President Xi Jinping stressed that China should reform and strengthen the structure of its supply front in order to increase the quality and efficiency of the supply system and provide a growth impetus for sustainable economic development, while speaking at the 11th meeting of the Central Leading Group for Financial and Economic Affairs on November 11. This lays new groundwork for the development of the 13th Five-Year Plan (2016-20) period.

Latest studies and discussions regarding the reform of the supply front have focused on a trend where management of the supply front will become the main economic focus, rather than the previous emphasis on demand.

The reform of the supply front indicates that there are problems on the supply side, which therefore demonstrates a natural shift in focus toward resolving those issues. However, the demand side is not yet perfect. Reforming the supply front does not mean that we can ignore the demand front. Instead, we should strike a balance between reforming both supply and demand sides.

Since the opening up and reform policies took hold in 1979, China has adopted a development strategy where the demand guides the supply and therefore the supply improves the demand conditions.

The logic behind this is that for a long time, there simply weren't enough supplies to meet both production and consumption demands.

As productivity was increasingly improved, the problem of short supply has been alleviated, and the issue has even disappeared in most sectors. In some areas the supply even exceeds demand, forming new problems. Especially after the 2008 global financial crisis, such imbalances have become increasingly serious.

So how did China handle the 1997 Asian financial crisis and even rescue the entire regional economy with an export-oriented development pattern?

This was due to the fact that at the time, the Chinese market was balanced and the demand for Chinese products at home and abroad was vibrant. Even though there were problems on the supply front, they were effectively covered up by the vigorous demand of the time.

However, problems regarding high production capacity, low efficiency, low quality and low benefits on the supply front have imposed too much requirements on the demand front.

Moreover, after continued growth, the demand front has also entered a bottleneck, being unable to digest the excessive stockpiles from the supply fronthence an increasing imbalance between the two forces.

Therefore, a reform of the supply front is necessary and conforms to the current conditions of the Chinese economy.

The focus of the reform should be to address the issues of excessive production capacity, structural imbalance, inadequate independent innovation capacity, low product quality and brand value, and a lack of core competitiveness.

As for the government, their tasks should focus on how to create a sound market environment, how to formulate good reform rules, and how to build a fair and just market order.

Based on these proposals, the government should give full play to the role of enterprises as major market players, making them act more in accordance with the market rules.

Should the government still use administrative methods to advance reforms, it may arouse conflicts of interests between the central and local governments, between different local governments and between local governments and companies. In particular, local authorities are likely to impede the implementation of various reform measures in order to protect their own interests.

Therefore, the success of the reform initiatives largely depends on whether the government can find a way to balance various interests and improve the industrial structure.

It is only when both the markets and the companies play a major role in the reform that it can achieve maximum efficiency.

By reforming the supply front, the Central Government aims at balancing demand and supply. Only enacting changes to the supply side is not enough.

The government must also make overall plans by taking all economic factors into consideration and coordinate between supply and demand.

In addition, the government should focus on improving distribution networks, removing various barriers and raising service levels, in order to achieve a state of equilibrium between supply and demand.

This is an edited excerpt of an article written by financial commentator Tan Haojun and published in Securities Times 

Copyedited by Bryan Michael Galvan

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