New major social contradiction entails deeper supply-side structural reform

By ZHOU MI / 10-25-2018 / (Chinese Social Sciences Today)

Chinese tourists shop abroad. Large numbers of mid- and high-end consumers have cast their eyes overseas.  Photo: FILE


For 36 years, the principal contradiction facing Chinese society was between the ever-growing material and cultural needs of the people and the low level of production. At the 19th CPC National Congress, the contradiction was changed into that between unbalanced and inadequate development and people’s ever-growing need for a better life.
This is a new judgment made in light of new historical conditions and fundamental realities in a new era, provoking a fresh comprehension of China’s new stage of development and its modernized economy. To better understand the evolution of the major social contradiction, it is necessary to start from the viewpoint of market competition theory.

New economic circumstances
The Chinese economy has grown at a slower pace since 2011, as the momentum of more than 30 years of high growth has been weakening. Meanwhile, such problems as diminishing demographic dividends, impeded exports, limited resources and a worsening environment have become increasingly grim. The social contradiction has exhibited many new features.

First, new types of consumption have emerged while large numbers of mid- and high-end consumers have cast their eyes abroad. In 2016, China’s luxury spending reached $120.4 billion, of which $92.8 billion was spent overseas. This means the Chinese bought nearly half of global luxury goods that year. Moreover, more than 70 percent of luxury purchases had been made outside of China for five years in a row as of 2016.

Second, the rate of return on investment has continued to fall, and the problem of excess capacity looms large. In China, the rate of return on investment dropped from approximately 14 percent in 1997 to 5 percent in 2013, and 14 sectors of industrial products have suffered from excessive inventory.

Third, there are growing risks of investment, production and circulation in the real economy moving to the virtual economy. In the public investment sphere, the share of investment in infrastructure and real estate is climbing, but that of equipment purchase investment, which is regarded more conducive to economic growth, is declining. In terms of corporate investment, capital that accounts for roughly one fourth of the GDP has not been committed to expanding reproduction, but to wealth redistribution instead.

Fourth, the mobile internet has begun to impact traditional exchange modes and the trend against intermediaries is obvious. The mobile internet has dealt a heavy blow to traditional urban business forms and industrial trade channels, making it more difficult to supervise and more likely to spin out of control. Proud Chinese brands from the traditional industrial age, such as Haier and Gree, are struggling to compete with unexpected players on the mobile internet.

Structural changes
Economic development has played a fundamental role in social change and the evolution of the social contradiction. To understand the above new economic circumstances, we shouldn’t focus solely on economic phenomena per se. It is vital to reconstruct the process of economic development starting from a broader social background, the conditions for transition and the law of the times.

The key reason for redefining the principal social contradiction lies in structural changes in the basic conditions of economic development, which manifest in the supply side, the demand side and supply-demand coordination.

First of all, the demand structure has been upgraded. As the income per capita has reached the middle to high level, demands such as social security, medical reform and educational equality have come to exceed basic needs like food and clothing. With the upgrade of the demand structure, residents’ consumption has tended to be more intellectual, rather than material, which has made it harder for the supply side to capture the changeable needs of the demand side.

At the same time, the technological structure on the supply side has started to change. In the past four decades, China has built up its technological strength by bringing in foreign investments and receiving technical transfer and spillover from developed nations. Now China is ranked second in the world when it comes to spending on research and development, and it has become number one in terms of domestic patent application.

With the increase of China’s technological strength, however, developed countries have begun to place higher intellectual property barriers by such means as patent protection and to enact confidential measures to reinforce knowledge blockades and market monopolies.

In the new international environment, China’s catching-up technical structure based on imports of advanced Western technology has become hard to sustain. Technological progress has led China into a self-dependent, self-innovative era.

On the basis of established technological tracks and paradigms, the industrialization model has shifted. The major industrialization methods of massive investments and high accumulation have transitioned to targeted investments based on accurate evaluations of micro businesses or entrepreneurs. “What to supply” has become more important than “how to supply.”

Furthermore, changes have taken place in the information structure for aligning supply and demand. Emerging in an apparently different context from Western industrialization, the mobile internet has started to terminate the information asymmetry between producers and consumers. In the traditional industrial age, consumers were incapable of fully recognizing products due to information asymmetry, so consumers on the demand side were always passive in their acceptance.

With the advent of the mobile internet era, consumers can resort to comments and word-of-mouth on the internet to fully communicate over product information like price, quality, function and usage. Previously scattered, passive consumers have now turned into interconnected, active groups that love sharing and experiencing new things. The role of the middleman or distributor between producers and consumers in the traditional exchange model has been greatly weakened.


Changing crucial structural problem
As a result of the above three structural changes, the supply-demand relationship has shifted from a sellers’ market to a diverse buyers’ market. Since market fundamentals were set by sellers and the “shortage economy” faced heavy demand for basic goods, the supply side needed to satisfy an infinite need with finite resources. This made it necessary to beef up capacity to meet the needs of the people. In this case, the principal contradiction in society was one between the ever-growing material and cultural needs of the people and the low level of production.

The crucial structural problem on the supply side at the time was to handle internal competition among producers. Only by investing to expand scale could producers maintain their competitive edge.

Now the market has changed into a diverse buyers’ market, and infinite supply has started to seek a finite demand. The supply side has both more difficulty identifying diversified and higher demands and more difficulty coping with changes in those demands, a situation which could easily aggravate structural imbalances.

Once structural imbalance causes a decrease in the rate of return on investment on the supply side, the combined effects of intensive investment and decreasing rates will force entities to invest more heavily to keep the profit target as in the traditional model, further unbalancing supply and demand.
In the meantime, as the demand structure tilts towards non-basic needs such as wealth, investment, social communication and a better life, investment will easily flow into high-return speculative fields, like real estate, foreign exchange and bitcoin. Consequently, the manufacturing productivity will continue to fall, and the real economy will be in a tougher situation.

Under such circumstances, the crucial structural problem facing the supply side is the competitive relationship between producers and consumers, so meeting people’s ever-growing need for a better life has become the core task. Imbalanced and inadequate development on the supply side, temporally or spatially, will exacerbate the contradiction. Therefore it is pressing to change the extensive economic development model into an intensive one.

With the evolution of the principal contradiction facing Chinese society in the new era, the previous practice of increasing investments on the supply side has become ineffective. Reforms must match new structures in demand, technology and information, thus deepening supply-side structural reform.


Zhou Mi is an associate research fellow from the College of Economic and Social Development at Nankai University.

(edited by CHEN MIRONG)