China’s economic policy is dancing to a new tune

Supply-side economics is the new buzzword.

The shift in China's macroeconomic management philosophy to “supply-side economics” from “demand-side economics” is worthy of attention, said a report by DBS.

DBS said that the newly established think-tank, China Academy of New Supply-Side Economics, attests to the increasing popularity of this philosophy.

"Supply-side economics shuns short term demand-side stimulus. Rather, it emphasizes tax reduction, deregulation, deleveraging and innovation to sustain long term economic growth. Therefore, the persistent poor readings of key economic figures such as PMI, industrial production, and fixed asset investment may not matter to policymakers as much as before. Policy choices made in 2014 and 2015 clearly suggested that the Chinese government has been increasingly reluctant to boost short term growth via traditional means," said DBS.

Here's more from DBS:

It is because demand-side stimulus tends to aggravate overcapacity problems and is no longer effective in boosting growth in the short term. The market may have already accepted many aspects of the “new normal”, but they may not have fully realized that policy responses are also changing.

Hence, do not be surprised if the Chinese government is ready to allow loss-making enterprises to go bankrupt this year despite weakening growth momentum. There is no standardized recipe when it comes to economic transitions.

China’s gradualist approach since 1980s has brought plenty of success - particularly in terms of per capita income growth. If old solutions no longer work, it is not a bad idea to seek solutions from supply-side economics.

The root of all present economic problems in China stems from misallocation of resources caused by distortion of key factor prices over a long period of time. Demand-side management does not effectively rectify this. The change of management philosophy may make many people uncomfortable as they find their existing analytical frameworks obsolete. Market watchers will be caught off guard this year if their mode of thinking does not change in accordance with the changing macro management philosophy in China.

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