When the word "reform" becomes the keyword for the annual NPC and CPPCC sessions, the question of "what kind of reform and how" obviously emerges.

China now faces a changing domestic and overseas economic environment. In the past several years, Keynesianism and monetarist theories have come to dominate the mainstream conversation over macro-economic planning.

Keynesianism comes into play when an economy loses its momentum for expansion, reflected in a government's stimulus plan, whereas in times of inflation, monetarism urges the government to cool down the economy.

Every stimulus package will inevitably result in overcapacity, non-performing bank assets, and increased local debts. Likewise, each austerity plan constricts small businesses, forcing them to resort to usurious loan, and in capital markets, plunges stocks.

This creates an imbalance between investment and consumption, squeezing the private sector and shortening the economic cycle.

For years, China's aggregate demand management policies have undermined the development of effective supply capacity, and restrained the economy's potential for long-term growth. Therefore, the focus of the economic policies ought to evolve from a demand management to supply management, with the priority given to loosen supply chains to optimize production flows.

Supply-oriented economic policies have a record of success. In the 1980s, then U.S. President Ronald Reagan and British Prime Minister Margaret Thatcher advocated for a series of such policies, and pulled the world economy out of a prolonged economic downturn. Deng Xiaoping's reform and opening up policy also followed the same idea.

Generally speaking, China's traditional industry sectors are still at overcapacity and limit the growth of emerging sectors that are seeking to build new supply chains. The status quo can not be alleviated by copying the traditional supply-side policies. Instead, a neo-supply-side policy framework should be adopted to cultivate good supply-demand relations.

Neo-supply-side economics calls for relaxing restrains on supply of resources and capitals, technological and institutional innovation, and on population mobility. It favours changing policies on population, household registration, workforce's migration, tax rates, reducing industrial monopolies and administrative intervention, and private businesses.

However, neo-supply-side economics is not the same as neo-liberalism, which calls for the government to completely quit direct economic activities. Neo-supply-side economics requires the government to clean up the mess left by a planned economy and Keynesianism before they quit the market. That is to say, the government still plays a vital role in lifting the restrictions on supply, but such an intervention has to be placed under strict and transparent supervision.

Neo-supply-side economics directly targets the deep-seated problems in China's economy, making itself a natural reform theory. I believe neo-supply-side policies will support the Chinese economy to achieve rapid and high-quality growth.

This article was first published in Chinese and translated by Chen Boyuan.

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