Stimulus not the way ahead for new reform

Think tank head says main problem is supply does not match demand

The head of China's top think tank, the Development Research Center of the State Council, has ruled out the option of massive stimulus measures, saying the largest problem in the economy lies on the supply side.

In an exclusive interview, Li Wei, president of the center, which is the sponsor of the China Development Forum that begins today, said there is "no need" for massive stimulus, as such measures could not revert the downward trend of China's growth rate in the long run.

"The largest problem in the Chinese economy now is that supply doesn't match the changing demand," he said.

Chinese spent around $200 billion overseas last year, which illustrates China's supply hasn't caught up with consumer demand. This problem can only be addressed through structural reform. Expansion of the demand-side alone won't eradicate the deep-rooted imbalances in the economy, and is not sustainable, Li said.

"The repeated pump-rise-fall cycles since 2012 suggest that stimulus cannot change the overall downward trajectory of the economy," he said. "As long as employment and inflation are on a good track, there is no need for massive stimulus."

His comments reflect the realization among top decision-makers that the credit and investment-fueled growth model has reached its limit, and they are fully embracing structural reforms to lift China's long-term potential growth rate. To make this happen, top officials such as Li have to ignore calls for renewed stimulus.

While stressing the pivot toward the supply side, Li also said the government will keep the demand side "modestly expansionary" in order to create an accommodative environment for supply-side reform. He also said that some of the reforms will reap short-term benefits.

"For example, the housing reform in 1998 was both a change in the supply and demand sides, which laid the foundation for eye-popping development in the real estate market over the next decade. Besides, if the industry monopolies can be shattered and market entry for private capital is easier in some regulated industries, both demand and supply will be spurred," he said.

The central government has set five priorities for supply-side reform this year, including destocking, deleveraging and cutting business costs. But Li said the supply side reforms will span a much broader range: from cutting administrative approvals to deregulation and opening-up the service sector. Other important reforms such as reforms of State-owned enterprises, financial reform, the reform of the household registration system and land reform will also be carefully coordinated.

"Overall, supply-side reform stresses greater opening-up, more market forces, less government intervention, reduced tax, and more structural adjustment for the long term," Li said.