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Outlook on Small and Micro-sized Economy under the Reform on Supply Front

Date: 2016-05-13

Researcher Li Quan at Research Institute for Fiscal Sciences, the Ministry of Finance

Recently, media have held intensive discussions about “the Reform on Supply Front” that is aimed to properly expand total demand and strengthen the structural reform on the supply side at the same time. The reform will affect small and micro-sized economy more greatly than other economic entities. Small and micro-sized economy despite taking an unfavorable position in economic operation is deemed as the most active economic group. With the financing cost, various taxes and dues, social security cost and transaction fees to be lowered, small and micro-sized enterprises (SMEs) will be able to make better innovations and be motivated to improve the quality, structure and efficiency of supply.

At present, the macro economy indices are worsening towards the rock bottom but at a further slowed pace, and some regional indices saw a slight rebound due to structural fluctuations. Seen from the international perspective, the global manufacturing PMI posted 51.2 in November 2015, down 0.1 points over October. Despite the decrease, it began to take on an expansion trend, which was mainly attributed to the contribution of developed economies. In the month, the manufacturing PMI in Europe and Japan further increased as compared with last month, and the growth rate of the index in the US and Britain still remained positive despite a slight slowdown. However, along with capital outflow and commodity price drop, the resource-intensive emerging economies across the world witnessed another drop in their growth rate. Due to the pressure from the overall structural adjustment, the Chinese economy operated towards a downturn but at a further slowed pace. In the view of IMF, the future world economy faces the possible risks from the monetary policy normalization, the collapse in commodity prices and the Chinese economic slowdown, so the global GDP growth rate in 2015 and 2016 was respectively regulated down by 0.2% to 3.1% and 3.6% at the beginning of November. With the addition of uncertainties in geopolitics and military actions, it is hard to determine the demand growth prospects. All of these add up to a weak recovery.

The Chinese official manufacturing PMI continued to be below the critical point in November, with a slight decrease of 0.2% as compared with last month to 49.6. Enterprise production kept growing. Although the growth slowed down and the improvement in order volume was limited, it still was a hard-won result against such a tough background. Affected by the potential risk, the growth rate of fixed assets investment dropped to 10.2%, hitting a record low throughout the year due to the de-stocking pressure.

In this context, special financial bonds in such forms as CDB development fund are put into circulation constantly, and meanwhile low-interest long-term special bonds have been substantially put into the state-supporting industrial manufacturing, new energy, environmental protection and other relevant enterprises. These policies are expected to greatly promote the economic structural adjustment in the future.

In November, “Economic Daily-PSBC Small and Micro-sized Enterprise Operating Index” (hereinafter referred to as “SMEOI”) reported 46.5, down 0.1 point slightly over previous month, indicating that small and micro-sized economy still operated downward. Seen from the sub-indexes, except the expansion index and the cost index, other indices all dropped; in the light of regional indices, all regions remained below the threshold separating contraction from expansion and the SMEOI of Northwest region was the lowest, down by 0.4 point to only 44.2. In this way, small and micro-sized economy seems to be still sluggish. However, from industrial indexes, it has taken on signs of pickup. Across the seven industries in November, the SMEOI in the manufacturing industry and the wholesale and retail industry decreased slightly, that in the construction industry remained unchanged from last month, and that in the agriculture, forestry, animal husbandry and fishery, the transportation industry, the accommodation & catering industry and the service industry started to pick up. This is a rare sight when SMEs are faced with operating and financing pressure at the year-end.

Seen from the operation of SMEOI since this year, the downturn of small and micro-sized economy has indeed been relieved substantially. If the effect of the reform on supply front can be smoothly transferred to small and micro-sized fields, it will do good to the early stabilization and recovery of small and micro-sized economy.

With regard to the reform on supply front, the relatively systematic theory was proposed by Mr. Jia Kang, professor and president of Huaxia New Supply-Side Economics Research Institute in 2013. He believes that the supply side will promote a new round of institutional reforms and innovations, which can effectively alleviate the risks in forms of stagflation, middle-income trap, and Tacitus trap and realize the growth mode change and the sustainable, healthy development urgently needed in China. He further outlines the policies of new supply side economics as the following eight points: (1) innovative-oriented country building and nationwide enterprise-starting; (2) citizenization-centered new urbanization and industrial structure upgrading and optimization; (3) tax-for-fee reform focusing structural tax reduction and substantial reduction in administrative review and approval; (4) opening China wider towards Asia, Africa and Americas for better cooperation and properly expanding investments aimed to seek quality and efficiency growth; (5) lifting “one child” control over urban areas in the population policy and transferring state-owned assets income and inventory to social security and public service fields; (6) mutual improvement in state-owned and non-state-owned economies in exerting respective advantages for coordinated development; (7) respective fulfillment of responsibilities as well as sound interaction, complementation and cooperation by government and market; (8) a new round of supporting measures in terms of “pricing, tax and finance” as well as financial reform and innovation.

Certainly, as China vigorously promotes the reform on supply front, it remains to be seen whether small and micro-sized economy can get stabilized by taking this opportunity. As the year end approaches, enterprises are faced with the upstream and downstream money payback pressure and the collection pressure from financial institutions in November. This is especially notable in small and micro-sized economy. At present, CPI drops to 1.3%, PPI has witnessed a same decrease for three consecutive months with no sign of narrowing in sight, and the price of production goods performs more sluggish. Therefore, if the reform on supply front can slightly leans towards small and micro-sized fields, good effects may be achieved. Specifically, on the one hand, de-stocking needs to continue; on the other hand, private capital, especial small and micro-sized economy, shall be given an easier access so that reasonable supply can facilitate optimal match of various elements. Meanwhile, an environment encouraging SMEs to innovate needs to be actively developed to accelerate the transformation and upgrading of small and micro-sized economy. With the multiple measures combined, it is possible for small and micro-sized economy to realize a full recovery as soon as possible, once the macro-economy picks up after hitting the rock bottom in the future.