A report by The Economist Intelligence Unit
China’s supply-side structural reforms:
Progress and outlook
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China’s supply-side structural reforms:
Progress and outlook
Introduction 3
I. Cutting industrial overcapacity—the great leap in reverse5
II. Destocking property inventory—defating the bubble 10
III. Corporate deleveraging—curing credit addiction 15
IV. Lowering corporate costs—China’s “Reaganomics” 19
V. Improving weak links—up the value chain 23
Conclusion 27
Contents
China’s supply-side structural reforms:
Progress and outlook
Executive summary
Supply-side structural reform (SSSR) dominates the economic policymaking landscape in China. In
place for more than a year, the policy shapes everything from the government’s efforts to reduce
excess industrial capacity to initiatives designed to curb high levels of corporate debt, such as debt-
for-equity swaps. Evaluating China’s ability to overcome its chief economic challenges and sustain its
economic growth is impossible without having a proper grasp of SSSR.
In this white paper The Economist Intelligence Unit provides the frst comprehensive, independent
analysis of the programme. Our starting point is that SSSR is not just a government slogan, but
something that ought to be subject to sober analysis under its own terms. The fve components of SSSR
– cutting excess industrial capacity, destocking property inventory, corporate deleveraging, lowering
corporate costs and improving “weak links” – are dissected, in turn, in the paper.
Among the key takeaways for businesses:
pressure on commodity prices. Capacity reductions in 2016 involved a signifcant amount of idle
capacity and were concentrated in the private-sector; they have yet to extend meaningfully into
productive capacity or the more sensitive state-owned enterprise (SOE) sector. The drive against
overcapacity might also be extended to sectors including automobiles, new materials and renewable
energy.
and slow progress on key reforms make it diffcult to stimulate demand across smaller cities. Efforts
to restrain supply are complicated by the dependence of local governments on land sales revenue; a
property tax is unlikely to come in force before 2020.
problematically structured and may not achieve that much in terms of meaningfully reducing corporate
debt. More important will be pushing a productivity reform agenda, especially among SOEs.
associated with administrative charges and social security. However, we do not expect a broad cut in
the corporate tax rate and the introduction of the Environmental Protection Tax in 2018 will create
signifcant additional costs for industrial frms.
China 2025 initiative will provide local frms with resources and capital to help their transition up
the manufacturing value-chain, to the likely detriment of foreign players. There are ineffciencies
associated with this top-down approach, however, and in terms of innovation, private technology
companies will play a bigger role in the transformation than state-owned frms.
SSSR’s close association with the Chinese president, Xi Jinping, means it is likely to shape economic
policy for many years to come. Companies and investors need to monitor the development of the policy
carefully if they are to be alert to both opportunities and risks in the Chinese business landscape.
China’s supply-side structural reforms:
Progress and outlook
Introduction
S
upply-side structural reform (SSSR) has emerged as the main economic policy framework in China.
It informs the government’s approach to the challenges facing the economy, such as massive
industrial overcapacity, a frothy property market and dangerously high levels of corporate debt. To a
signifcant extent, SSSR has superseded the reform blueprint set out by the ruling Chinese Communist
Party (CCP) in November 2013, which called for the market to assume a “decisive” role in allocating
resources by 2020.
SSSR ought to be central in any analysis of China’s economic prospects, but surprisingly little
attention has been given to it by independent research organisations. The Economist Intelligence
Unit aims to fll that gap in this white paper. We describe the main components of SSSR; evaluate what
progress has been made in meeting its aims; and offer our views on how the initiative might evolve,
including which elements of the policy are more likely to succeed than others. Our analysis is based on
a rich understanding of the Chinese policy environment and access to comprehensive economic data,
combined with interviews with several local policymakers and academics.
Origins and defnitions
SSSR was frst mapped out in December 2015 at the Central Economic Work Conference (CEWC), a high-
level annual meeting of policymakers and senior CCP leaders, including the president, Xi Jinping. The
conclave noted that SSSR would help to “guide the new normal”, a phrase coined by Mr Xi after he took
over leadership of the CCP in 2012 to refer to an anticipated period of slower economic growth.
The starting point for SSSR was recognition in offcial circles that Keynesian demand-side policies
had run their course. Years of boosting the economy with monetary and fscal stimulus had given rise
to structural imbalances and fnancial risks. Easy credit had caused “zombie companies” to proliferate
in overcapacity industries; the fnancial system was exposed to a massive property overhang caused
by overinvestment; and domestic frms were not producing the goods and services demanded by local
consumers.
SSSR is meant to wean the economy off its dependence on stimulus, helping to drive growth by
unleashing latent productivity. It aims to curtail supply in some areas, while making adjustments
in regulations and markets to incentivise companies to invest more in producing what is actually in
demand. The 2015 CEWC identifed fve areas of focus under SSSR, known in Chinese as the “three cuts,
one reduction, one strengthening” (三去一降一补):
1. Cutting (industrial) overcapacity
2. Destocking (property inventory)
3. (Corporate) deleveraging
4. Lowering corporate costs
5. Improving “weak links”
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