It’s clear that China is embracing “supply-side reform” to reduce excess industrial capacity and shed unviable assets because its debt-driven growth policies were not working. The shift is essential for battling the middle income trap, but the reform’s effectiveness remains uncertain.
While Chinese leaders have set the tone to let the market play a decisive role, many reform policies have deviated from this principle in light of hefty social and financial costs.
One of the greatest reform challenges is employee settlement in heavy industries plagued by overcapacity including steel, coal and aluminium. More than 2m workers may be affected.Some may argue the reform is easier to carry out this time than the state-owned enterprises (SOEs) reform in the 1990s when about 27m workers were let go. However, this argument ignores the fact that the cost to maintain a reasonable quality of life for unemployed workers is much higher today than in the 1990s when most SOE employees lived in welfare houses.