Chi Fulin:Deepen Supply-side Structural Reform with Stress on the Real Economy
Created On : 2017-12-04    Views : 195

Source: Economic Daily

It is pointed out in the report to the 19th National Congress of the CPC that the principal contradiction facing Chinese society has evolved. What we now face is the contradiction between unbalanced and inadequate development and the people's ever-growing need for a better life. We must recognize that the evolution of the principal contradiction facing Chinese society represents a historic shift that affects the whole landscape. In the face of new contradictions and the need to solve new problems, we must focus our efforts on propelling economic restructuring and upgrading, building a modern economic system, and promoting the economic transition from high-speed growth to high-quality development. The essence of economic restructuring and upgrading is innovation and change. We must give priority to development of the real economy and further supply-side structural reform. It is critical to make the market play a decisive role in the allocation of resources and better develop the role of government. In accordance with the requirements of the 19th National Congress, we must make every effort to develop the real economy as the focus of deepening supply-side structural reforms, and improve the quality, efficiency, and driver for economic development.

Endeavor to solve contradictions standing in the way of development of the real economy.

To propel economic transformation and upgrading and build a modernized economic system, we must make efforts to develop the real economy. It is also the key to deepening supply-side structural reform. The report to the 19th National Congress stresses that in developing a modernized economy we must focus on the real economy, give priority to improving the quality of the supply system and enhance our economy's strength in terms of quality. This points to the direction that the real economy should develop in future. Below are some of the issues that are worthy of our attention:

First, the real economy is faced with structural contradictions. At present, China's economic restructuring is at a new historical starting point. The economic transformation and upgrading has tremendous development potential and market space, which serves as the primary base for building a modern economic system. For example, the consumption structure is changing from material consumption to service consumption. It is estimated that by 2020, the proportion of service consumption of urban residents will rise to about 50%. However, the problem is that the real economy still faces major structural imbalances, which are shown as below. First, structural imbalances between supply and demand exist in the real economy, while consumer demand is moving up to a higher end. However, the major product supply system remains at the low-medium end. Second, there is imbalance between the real economy and finance. Third, there is imbalance between the real estate sector and the real economy. These structural contradictions facing the development of the real economy deserve our attention.

Second, structural contradictions are mainly attributable to institutional problems. The structural imbalance between supply and demand in the real economy largely reflects that reform of the enterprise system has failed to keep pace with the economic restructuring and upgrading, and that the current supply system can hardly provide high-quality products and services. The imbalance between the financial sector and real economy, as well as that between the real estate industry and the real economy is a major manifestation of the institutional contradictions and problems facing the real economy. China is in a crucial period of industrial restructuring. In this special period, if the institutional environment for the development of the real economy is not favorable, excess capital will enter the field of the virtual economy, which may lead to the financial institutions being distracted from their intended purpose.

Third, the supply-side structural reforms must aim to rejuvenate the real economy. The real economy is the foundation of our country as an economic power. As China is turning from a big economy to a powerful one, we need to strengthen the real economy and make it bigger and stronger. The final result of unleashing the tremendous potential of economic restructuring & upgrading and building a modern economic system needs to be reflected in the development of the real economy. For example, the new economy, represented by the digital economy, needs to rely on the real economy. At present, we have achieved notable results in overcapacity reduction, de-stocking, deleveraging, cost reduction and improving underdeveloped areas. To deepen supply-side structural reform, it is imperative to make a breakthrough in creating a sound institutional environment for the development of the real economy.

Promote enterprise system reform by focusing on stimulating innovation

Enterprises are cells of social development. Accelerating economic restructuring & upgrading and building a modern economic system depends on a sound enterprise system. To revitalize the real economy and improve the quality of the supply system, we must start with reforming the enterprise system and form an institutional arrangement conducive to drawing more private investment, as well as encouraging innovative enterprises.

First, improve the property protection system. To ensure the formation of “one shall have his peace of mind when he possesses a piece of land” in the real economy, we must focus on the formation of a legal system of property rights protection. On the one hand, it is necessary to strictly protect the property rights of the non-public ownership economy in accordance with the law, and to ensure that the property rights of both the public economy and non-public ownership economy are equally protected by the law and are not infringed upon, giving private investors "reassurance." On the other hand, given the realistic demand for corporate innovation and development, we must expand the scope of property rights protection, strictly protect intellectual property rights, and form a system that encourages scientific research personnel to make innovations and start up their own businesses by virtue of their own intellectual property rights.

Second, make a new breakthrough in the reform of mixed ownership. State-owned enterprises are the backbone of China in its effort to achieve economic development, restructuring and upgrading. The construction of a modern economic system objectively requires that state-owned enterprises strengthen innovative efforts and transform themselves into innovative enterprises. It is clearly stated in the report to the 19th National Congress we will further reform state-owned enterprises, develop mixed-ownership economic entities, and turn Chinese enterprises into world-class, globally competitive firms. That requires us to focus on developing innovative enterprises in the effort to reform mixed-ownership entities, make state-owned capital stronger via improving the internal management structure of enterprises, and provide a larger institutional space for the participation of social capital. 

Third, form an institutional arrangement that is effective in stimulating and protecting entrepreneurship. Market vitality and entrepreneurial innovation come from entrepreneurship. To develop the real economy and to build a modernized economic system, we need a large number of entrepreneurs who have an international view, aim high & look far, are down-to-earth and ambitious to advance modern management, and have the courage to assume social responsibilities. This requires us to create a good environment that is conducive to cultivating world-class entrepreneurs and protecting their legal rights of property, and earnings from innovation. In addition, we should reform the state-owned capital authorized operating system and form relevant institutional arrangements that protect the independent management rights of entrepreneurs.

Advance business environment construction by breaking monopoly

A good business environment is conducive to stimulating vitality of the real economy, and attracting international capital to participate in China’s economic transformation and development in an open world economy. At present, optimizing the business environment has become not only a realistic demand for China to participate in global economic competition, but also a key point in stimulating the vitality of the domestic market and rejuvenating the real economy.

First, we must innovate the market access system. The report to the 19th National Congress has made it clear that we will introduce a negative list for market access nationwide, sort through and do away with regulations and practices that impede the development of a unified market and fair competition, support the growth of private businesses, and stimulate the vitality of various market entities. This shows that it has become an important task of the current market-oriented reform to push forward market access system innovation with greater determination and courage, to foster an internationalized and legalized business environment. Judging from the reality of our country, to optimize the business environment, we should focus on breaking monopoly and create a fair and competitive market environment.

Second, we should concentrate on breaking administrative monopoly and market monopoly in the service sector. The development of a modern service industry is an important part of building a modern economic system, which is conducive to the formation of new momentum in the process of economic restructuring and upgrading, and continuously improving the quality of the supply system. To speed up the opening up of the service market and making the "cake" of the modern service industry bigger, it is necessary to break the administrative monopoly and market monopoly in the service sector, which should be an important part of our effort to deepen supply-side structural reforms. That requires that greater efforts be put into strengthening relevant legislation, improving the legal system and exploring ways to break monopoly that are in line with the law of economic development, so as to effectively safeguard market competition and consumer interests and enhance economic efficiency.

Third, foster a fair market environment by focusing on the development of small and medium-sized enterprises (SMEs). In recent years, small and medium-sized enterprises have played an increasingly greater role in the development of the real economy. They have become not only a main part of employment, but also an important strength for promoting innovation and development. At present, it is necessary to speed up implementation of the Law on Promotion of Small and Medium Enterprises, establish a fair competition review mechanism, and a fund for promoting the development of SMEs, form a modern financial system that supports their development, and establish & maintain a fair and competitive market environment for them.

Fourth, reduce business costs by focusing on tax reform. We shall further reduce tax and fees as a way to substantially reduce enterprise system cost, optimize the business environment and rejuvenate the real economy. In recent years, tax cuts have increasingly become a policy orientation for countries to attract international capital inflows. To build a new open-economy system and promote the formation of an open pattern in an all-around way also requires us to make a new breakthrough in tax reforms. In reality, the tax burden on manufacturing enterprises in our country is not low. In the next few years, deepening the reform of the taxation system and further increasing the proportion of direct taxes will help to substantially reduce the costs of enterprises, and give play to the role of tax revenues in redistribution.

Push forward streamlining administration and delegating powers by focusing on supervision system reform

Over the past five years, the administrative system reform with emphasis on streamlining administration and delegating power to the lower levels has played an important role in distributing reform dividends, promoting economic restructuring, and coping with the pressure from economic downturn. Now, we are in a new situation where economic operation is faced with more risk factors of various kinds. Under this backdrop, deepening the reform of decentralization, by focusing on supervision system reform, will help the market play a decisive role in allocation of resources and help the government play a better role.

First, promote decentralization by focusing on supervision system reform. At present, the formation and accumulation of economic and financial risks in the economic operation of our country has much to do with the lagging supervision reform and inadequate supervision. In order to prevent all types of risks from occurring and maintain a bottom line for systemic financial risks, we need to speed up regulatory transition and transformation. For example, we may consider establishing a regulatory system for capital markets so as to protect the rights and interests of investors and realize transition from a separated financial regulation system to an integrated one. We should promote regulatory transition that focuses on breaking administrative monopoly in the service sector, establish an administrative monopoly review mechanism, and improve the service market regulatory standard system to achieve negative list management of the service sector market access; improve the unified authority of the food and drug regulatory system to meet the needs of the whole society, to upgrade the structure of consumption, and form a good economic and social environment.

Second, effectively improve the quality of the public goods supply system. Improving the quality of the public goods supply system is not only a major task of economic restructuring and upgrading, but also an important way to achieve shared development. To build a modern economic system, we need to improve the quality of the public goods supply system as soon as possible. In this process, it is necessary to make improving the quality of the public goods supply system an important task. While ensuring the ultimate responsibility of the government to undertake basic public services, we should liberalize the non-basic public service market, innovate the public service system with emphasis on government procurement of public services, accelerate de-administration reform of institutional organizations, and increase the supply of public services by mobilizing the market and social organizations.

(The author is President of the China Institute for Reform and Development (Hainan) and a member of the Academic Committee of Shanghai Academy)