upply-side structural reform has been a top policy objective for China since it was introduced by President Xi Jinping in late 2015, but a new buzzword has now entered the country’s economic lexicon - “demand-side reform.”
The phrase made its public debut at a meeting of China’s Politburo, the ruling Communist Party’s top decision-making body chaired by the president, where leaders discussed economic policy priorities ahead of the annual Central Economic Work Conference at the end of 2020.
“[We] should stick to supply-side structural reform while at the same time paying attention to demand-side reform to eliminate blockages, address shortcomings and link production, distribution, circulation and consumption to create a higher-level dynamic equilibrium in which demand drives supply and supply creates demand, improving the overall effectiveness of the national economic system,” the Politburo agreed, according to the official readout of the meeting issued by the Xinhua News Agency.
Vice Premier Liu He alluded to the new focus in an article published in late November in the People’s Daily, the flagship Party newspaper.
Liu said the major pain-point in China’s economy still lies on the supply side, as supply-side factors have not been able to adapt to changes in demand. But while he called for a more “innovation-driven, high-quality supply” that could drive demand, Liu said the country should also attach great importance to “demand side management” and stick to the basic strategy of expanding domestic demand.
The greater focus on demand-side reform comes amid concern that the recovery of domestic consumption has lagged behind the rebound in exports and investment - the other forces that drive GDP.
The Xinhua report did not mention specific initiatives or strategies that leaders are considering to push demand-side reform. But the government is already pursuing demand-side economic policies because they stimulate demand, such as tax cuts, government spending and boosting investment.
Some clues came from the Fifth Plenum of the 19th Central Committee of the Communist Party of China, which took place in October and mapped out the goals for the 14th Five-Year Plan (2021-2025). The meeting proposed improving income distribution through taxation, social security and transfer payments. It called to strengthen the role of taxation in income redistribution and gradually increasing direct taxation, adjusting the distribution relationship between urban and rural areas, regions and groups, and developing charity and other public welfare programs.
The key to promoting consumption and boosting demand is to improve income distribution and put more money in the hands of low- and middle-income groups, analysts said.
High-end consumption and sales of luxury goods, cars and homes have increased significantly and domestic consumption of luxury goods is expected to top 40 percent of world consumption in 2020, according to Li Xunlei, chief economist at Zhongtai Securities. But the problem lies with consumption among low-income households and the middle class, who make up the vast population.
The core of demand-side reform is to improve people’s ability to consume, which is related to income expectations, demographics and the social security system, Qu Qing, chief economist at Jianghai Securities, wrote in a note. He cautioned that unleashing demand to promote consumption cannot happen overnight.
But other economists say that the role of investment, a key driver of demand in China, cannot be ignored. Rather, the focus needs to shift to spending on the “new economy” rather than traditional infrastructure investment and sunset industries.
Demand-side reform will drive the authorities to pour more money into new economy sectors, economists at Guotai Junan Securities wrote in a note.
Continuing to pour money recklessly into inefficient infrastructure and other projects with lower returns will do little to boost economic growth, further burden local governments with heavy debts and lead to bigger financial risks, said Li Qilin, chief economist of Hongta Securities.