China's supply-side reform isn't what you think

DUE to the scale of China's system, it will not be possible for Beijing to pursue a "shock therapy" to cure its structural illness like the Reagan- Thatcher reform style of the US-UK in the 1980s which resulted in massive bankruptcies and unemployment. Given today's weak growth momentum and sensitive political environment, China cannot even afford to repeat the same state-sector reform effort that it implemented in the late 1990s.

Rather, supply-side reform today is aimed at improving the state- owned enterprises' (SOEs) operating efficiency through mergers and acquisitions, public-private partnership or mixed ownership, job retraining, early retirement, etc. The trouble is that this approach may address the flow of the new excess-capacity problem but not the stock of the old problem, and there is an incentive incompatibility problem behind the process.

Reform in the good old days