By Tom McGregor, CNTV Commentator
The 2016 National People’s Congress (NPC or China’s top legislature) has already convened and Chinese leaders – President Xi Jinping, Premier Li Keqiang and the State Council (Cabinet) – are calling for sweeping reforms to create better conditions for a prosperous nation and to ensure sustainable development.
Beijing has pledged to tackle major reform tasks, such as reducing over-capacity, destocking, deleveraging, reducing costs and shoring up weak growth sectors to build on long-term economic growth.
These reforms are more than macroeconomic policy buzz words and signal an abrupt change to China’s economic growth mode. The days of Keynesian economics, which support a massive influx of government stimulus programs to raise consumption patterns, are over.
Instead, a new agenda – supply-side reforms – will enter the stage. But, what does supply-side mean? What can be achieved from it? Will supply-side be the right solution for China right now? Well, let’s take a closer look.
Understanding the supply-side approach
According to Investopedia, supply-side economics favours tax cuts for investors and entrepreneurs that provide incentives for consumers to save and invest. Its core belief is that production (supply of goods and services) would play the most pivotal role for economic growth.
Supply-siders oppose Keynesian policies that suggest governments should inject subsidies to rescue an economy. They propose to reverse course by introducing lower tax rates and fewer government regulations to help businesses operate in a smooth manner.
Supply-siders believe higher productivity creates a better economic scale. Beijing supports the objective and also seeks to rejuvenate the domestic manufacturing sector by shifting away from mass production of cheap goods.
There’s a drive to developing more innovative, hi-tech and top-quality goods and services for the marketplace.
Tax cuts are key to higher production value
Reducing tax rates can keep an economy stronger. Lower taxes mean more money for workers and families, which they can use for saving, investing and shopping. Hence, Beijing has recently announced new tax rate reductions.
ECNS (English China News Service) reports that, “China will cut deed and business taxes for home purchases in most cities to help end the property glut.”
According to the Ministry of Finance, “Houses above 90 sq./km. will be levied a deed tax at 1.5 percent of the house value, down from the current 2 percent for first-time buyers in all Chinese cities.”
Beijing has also lowered taxes on luxury goods imports and automobiles, which have resulted in a surge of more buying in China’s real estate and retail sectors.
Securing more innovative manufacturing
China cannot expect to remain a global leader of exporting cheap goods forever. Labor costs would eventually rise when a manufacturing-based nation experiences strong global demand for its products. The abundant cash flowing into the country cause steeper inflation, which means higher wage demands.
Consequently, many Chinese factories are moving out to open up in Latin America, Africa and Southeast Asia countries where lower manufacturing costs benefit their bottom lines.
China’s manufacturing sector must adapt to the current scenario, while also shutting down money-losing coal mines and steel factories to address excess capacity concerns.
Beijing sees a solution by reorienting the manufacturing industry to produce more high-quality, hi-tech and highly-advanced goods and services to the rest of the world.
Telecommunications giant, Shenzhen-based Huawei Corp., has set a good example by making major investments in research and development (R&D) to introduce new devices to global consumers.
Charging ahead on a winning path
As China enters a ‘New Normal’ period for its economy, Beijing believes that supply-side reforms can benefit the nation. A new era of lower tax rates, more streamlined regulations and a drive for innovation can instill a spirit of optimism for the Chinese and the world as well.