Cutting overcapacity, deleveraging, reducing housing inventories -- China's supply-side reform sounds painful, but growth will be seen in the long run, according to an investment bank's report on Tuesday.
The direct negative impact on GDP of cutting overcapacity in five key industries will be 0.3 to 0.4 percent, while tax cuts, also a key measure of supply-side reform, will boost GDP by 0.4 percent, according to China International Capital Corporation (CICC), a Chinese investment bank.
The estimate was based on the assumption that the five industries, namely iron and steel, coal mining, cement, ship building, and aluminum and flat glass, will reduce 10 percent of their production capacity annually over the next three years.
In the short-term, tax cuts will raise private investment and stimulate consumption, thus giving GDP growth a 0.4-percent boost if fiscal deficits rise to 3 percent in 2016, CICC said. CICC earlier said overcapacity cuts will slightly push up the unemployment rate, but considering the number of people that will be re-employed, the impact is very limited.
Credit risks will also rise as the implicit guarantee by the government to cover non-performing companies' debt will be withdrawn, but in the long run, supply-side reforms will help achieve market-based pricing of credit risks and encourage the flow of funds to more efficient industries, the report showed.
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