President Xi Jinping raised the theme of "supply-side reforms" at a meeting of the Leading Group for Financial and Economic Affairs in November and then again at the Asia-Pacific Economic Cooperation summit later in the same month. "It is not enough to try to solve the deep-seated problems of the world economy's through monetary stimulus alone," he said. "More effort should be made to boost reforms of the economic structure,so that the supply system can adapt to changes in demand." The Central Economic Work Conference,a key gathering for China's economic planning,mapped out some objectives in December,stating that there should be a reduction in surplus capacity,reductions in inventories and reductions in financial leveraging. This should help reduce costs and in turn solve serious structural problems that need to be addressed. Supply-side structural reform takes aim at the contradictions that have arisen in what is called the "new normal" of slower growth in China's economy. It provides a foundation for sustainable growth over the medium and long term and represents an important change in strategy.

Structural Contradictions 

The structural contradictions of China's economy are apparent in many sectors and they arise from a diverse set of problems. Some industries face the serious issue of surplus production capacity. Over the past years,China's manufacturing sector,especially in traditional industries such as iron and steel,coal,petrochemicals,non-ferrous metals and building materials,had seen rapid expansion in the past. But that spurred huge build-ups of production capacity. On one hand,during the accelerated advancement of globalization at the end of the last century and in the early years of this century,China made use of an export-oriented strategy to boost domestic manufacturing. It resulted in China's integration into the global division of labor and contributed to this nation's rapid economic growth. It made China adapt to international demand dominated by advanced economies,such as the United States and the European Union. Macroeconomic policy placed particular emphasis on demand management. It was dominated by investment-driven growth and supplemented by easy monetary policy. This drove rapid growth of domestic infrastructure and real estate investment. In turn it spurred the expansion of production capacity of related industries such as iron and steel and building materials. The slow global recovery that followed the economic crisis and new trade policies put in place by countries such as the US led to a sharp slowdown in the growth of overseas demand. That had a knock-on effect for the domestic real estate market and it left a large surplus of production capacity. This has become one of the major factors for China's slowing economic growth.

At the same time,supply in some areas of the economy has been unable to keep up with demand. This problem is evident in the consumer sector as well as in manufacturing. On the consumption side,as a result of economic development and rising incomes,there is more discretionary demand and demand for high-end products. But the brand reputation of domestic consumer products still needs improvement. Food safety and other product quality issues have hurt confidence in domestic brands,and that has led to strong demand for superior products-many of them imported.