Xie Di: Coordinating Total Supply and Total Demand to Further Smooth the National Economic Cycle
Scientific and effective macro-control is an important guarantee for the steady and healthy development of the economy. The Central Economic Work Conference [1] held in December 2024 clearly proposed to “coordinate the relationship between total supply and total demand, and smooth the circulation of the national economy.” This is General Secretary Xi Jinping’s profound grasp and scientific summary of the laws of China's economic development in the New Era. The unified planning and comprehensive arrangement of the relationship between total supply and total demand is not merely a top-level design for promoting annual economic work, but also a sublimation of the concept of macroeconomic governance. It is of great significance for smoothing the national economy’s circulation through more proactive and effective macro policies and promoting China's high-quality development.
I
The balance between total supply and total demand is a prerequisite for the smooth progression of social reproduction. Total supply refers to the total amount of social products produced within a certain period (usually one year), encompassing both physical quantity and value; total demand refers to the demand for social products formed within a certain period (usually one year) to compensate for the means of production and labor power, likewise encompassing both physical quantity and value. The balance between total supply and total demand includes two aspects: first, aggregate balance, i.e., the value-based balance between total supply and total demand; and second, structural balance, i.e., the balance between social production sectors expressed in physical form. Aggregate balance is a necessary condition for structural balance, while structural balance is a sufficient condition for aggregate balance. To achieve the balance of total supply and total demand, the solution provided by classic Marxist authors [2] was to establish social ownership of the means of production, eliminate commodity-money relations, and subsequently allocate the total social labor in a planned and proportionate manner.
The supply-demand mechanism, along with the price and competition mechanisms, constitutes the basic framework of the market mechanism. Supply and demand are the two fundamental aspects of the internal relations of a market economy; they exist in a dialectical relationship of both opposition and unity, manifesting mutual dependence and mutual conditioning. Without demand, supply cannot be realized, and new demand can give rise to new supply; without supply, demand cannot be satisfied, and new supply can create new demand. Total supply and total demand are aggregate concepts formed by the summation of individual supply and demand, and they follow the common laws governing supply and demand.
Under the conditions of a socialist market economy, because the basic contradiction of the market economy—that between private labor and social labor—still exists, the balance between total supply and total demand is accidental and temporary, while imbalance is inevitable and the norm. How to combine the "effective market" and the "proactive government" [3] to achieve the steady and healthy operation of the national economy by adjusting the relationship between total supply and total demand is a subject requiring in-depth exploration. Since the 18th CPC National Congress, General Secretary Xi Jinping has proposed a series of new theories centered on coordinating total supply and total demand. In particular, based on changes in the principal aspect of the contradiction during the movement of contradictions between total supply and total demand, he creatively proposed that although China faces cyclical and aggregate problems, structural problems remain the most prominent.
In this context, supply-side structural reform is the main thread. The ultimate goal of supply-side structural reform is to satisfy demand; the main focus is to improve the quality of supply; and the fundamental path is to deepen reform. At the same time, it is necessary to adhere to the strategic basis of expanding domestic demand to form a virtuous cycle of the national economy. Based on the actual situation of China's economic development, we must establish effective institutions for expanding domestic demand, gradually improve the market system and mechanisms, and accelerate the construction of a national unified large market.
II
To achieve the macro-control objectives of economic growth, full employment, price stability, and balance of payments—while simultaneously promoting the synchronization of resident income growth with economic growth—one must properly handle the relationship between the short term and the long term of economic operation.
On the one hand, to implement the people-centered development philosophy and leverage the advantages of the socialist system, China's macro-control should and can resolve the medium-to-long-term structural contradictions in economic operation. This will promote high-quality development to better resolve the contradiction between the people’s ever-growing needs for a better life and unbalanced and inadequate development [4]. This requires strengthening supply-side management, stimulating the drivers of economic growth, and improving the quality and efficiency of the supply system by optimizing factor allocation and adjusting the economic structure. We must remain unwavering in adhering to the main thread of supply-side structural reform.
On the other hand, in reality, there is no way to "bypass the short term to reach the long term directly." Economic operation is merely the result of one short term succeeding another. Against a backdrop of a complex domestic and international environment, while facing the various difficulties and challenges of China's economy, we cannot ignore the short-term regulatory effects of macro-control. A succession of short-term processes constitutes the "long term," and every short-term fluctuation becomes a factor affecting long-term development trends. This necessitates high importance being placed on the effective implementation of demand-side management policies, which are characterized by short-term regulation aimed at expanding the volume and scale of total social demand.
Handling the relationship between the long term and the short term in macro-control requires coordinating the promotion of supply-side structural reform with the implementation of the strategy to expand domestic demand. Promoting supply-side structural reform is consistent with the strategy of expanding domestic demand; they are not in a relationship of simple substitution. From the perspective of political economy, discussing the supply side while abandoning the demand side (or vice versa) is one-sided. The two are not an "either-or" zero-sum substitution but must cooperate and advance each other. To deepen supply-side structural reform, we must utilize the important tool of demand-side management and organically combine the strategy of expanding domestic demand with deepening supply-side structural reform. By placing equal emphasis on demand-side management and supply-side reform, we can form a higher-level dynamic equilibrium where demand drives supply and supply creates demand.
III
The 2024 Central Economic Work Conference proposed to vigorously boost consumption, improve investment efficiency, and expand domestic demand in an all-round way. Against the current backdrop of international instability and uncertainty, rooting ourselves in the domestic sphere, relying on the advantages of our ultra-large domestic market, and fully tapping the potential of domestic demand will help mitigate the impact of external shocks and declining foreign demand. It will also ensure the basic normal operation of China's economy and the overall stability of the social situation in extreme circumstances.
Accelerating the cultivation of a complete internal demand system is an important foundation for smoothing the national economy’s circulation and strengthening the dominant status of the "domestic big cycle" [5]. The key to constructing the new development dynamic lies in the unobstructed flow of economic circulation. Economic activity is a dynamic, recurring cycle that requires the organic connection of various combinations of productive factors across the stages of production, distribution, circulation, and consumption to achieve circular flow. Under normal circumstances, if the economic cycle is smooth, material products will increase, social wealth will accumulate, people's well-being will improve, and national strength will grow, forming a spiral of upward development. If blockages or breakpoints appear in the economic cycle, the circulation will be obstructed. Macroscopically, this manifests as declining growth rates, increased unemployment, accumulation of risks, and balance of payments imbalances; microscopically, it manifests as overcapacity, declining corporate efficiency, and reduced resident income.
To smooth the national economy’s circulation, we must adhere to the "two-point theory" [6] and coordinate total supply and total demand. On one hand, the primary task for smoothing the economic cycle is effective circulation on the supply side—using effective supply capacity to penetrate bottlenecks, eliminate constraints, create jobs, and provide income, thereby forming demand capacity. Therefore, we must adhere to the main thread of supply-side structural reform. On the other hand, expanding domestic demand is not a temporary tactic to deal with financial risks and external shocks, nor is it about "flood-style" stimulus [7], nor is it simply about increasing government investment. Rather, we must establish effective institutions for expanding domestic demand based on the actual situation of China's economic development, release the potential of domestic demand, accelerate the cultivation of a complete internal demand system, strengthen demand-side management, expand resident consumption, and upgrade consumption levels, so that the establishment of an ultra-large-scale domestic market becomes a sustainable historical process.
Facts have proven that there is still significant room for China to further expand consumption and investment demand. In 2023, the total retail sales of social consumer goods exceeded 47 trillion yuan. Since the start of 2024, as a series of existing and incremental policies act in synergy and continue to show results, the consumption demand of Chinese residents has been continuously released. In the first ten months of 2024, China's total retail sales of social consumer goods approached 40 trillion yuan. In October alone, retail sales grew 4.8% year-on-year—an acceleration of 1.6 percentage points over the previous month and the highest single-month growth rate since March. Taking the "Two Heavies" [8] (implementation of major national strategies and capacity building for security in key areas) and the "Two News" [9] (large-scale equipment renewal and trade-ins of consumer goods) as examples, more than 30 million people participated in the consumer goods trade-in policy, driving sales of over 4000 billion yuan. In October, retail sales of household appliances, audio-visual equipment, office supplies, furniture, and automobiles by units above a designated size increased year-on-year by 39.2%, 18%, 7.4%, and 3.7% respectively, driving up the total retail sales of social consumer goods by 1.2 percentage points. Driven by the large-scale equipment renewal policy, investment in the purchase of equipment and instruments increased by 16.1% year-on-year in the first ten months, contributing more than 60% to investment growth. As relevant policies and measures take effect, the potential for China's consumption and investment demand will be further released, transforming into surging momentum for steady economic growth.
IV
Coordinating the relationship between total supply and total demand involves both demand management and supply management; we should ensure coordination between these two sets of policies.
Demand management refers to implementing macro-control policies starting from the demand side. It includes management of both the aggregate demand and the demand structure. Aggregate demand management refers to policies that increase or decrease the total volume of demand through fiscal and monetary policy to achieve a rough balance between total supply and total demand. When aggregate imbalance occurs, the most direct and effective method is for the government to use fiscal and monetary policies. In terms of fiscal policy, when total demand is insufficient, the government can increase investment and consumption demand by reducing taxes or increasing fiscal expenditure; when total demand is excessive, it adopts the opposite policy. In terms of monetary policy, the central bank increases total demand by increasing the money supply, or decreases it by reducing the supply. Compared to the longer transmission mechanism of monetary policy, fiscal policy acts more directly and produces faster results.
Demand structure management emphasizes resolving imbalances at the structural level to achieve aggregate balance. Its primary policy is to change the structure of investment demand, resident consumption demand, government expenditure, and net exports by adjusting the distribution of national income to promote structural balance.
Supply management refers to macro-control policies implemented from the supply side, the core of which is supply structure management. Its main characteristics are: first, it has clear "targeting" (靶向性), focusing on adjusting the supply of specific sectors. Second, its goal is not only to achieve supply-demand balance in specific sectors but also to seek long-term development for the national economy. Therefore, supply structure management is committed to phasing out backward sectors and excess capacity, reducing corporate leverage, and improving corporate market competitiveness. Third, it focuses on solving medium-to-long-term problems, emphasizing the promotion of economic structural transformation, upgrading, and high-quality development. The supply-side structural reform implemented by China is a supply structure management policy. Supply structure management must usually be combined with demand management to stabilize the macroeconomy and promote high-quality development.
The 2024 Central Economic Work Conference pointed out the need to implement a more proactive fiscal policy, including raising the fiscal deficit ratio to ensure that fiscal policy continues to exert force and becomes more effective. We must increase the intensity of fiscal expenditure, strengthen guarantees for key areas, and increase the issuance of ultra-long-term special treasury bonds to support the "Two Heavies" projects and the "Two News" policies. Furthermore, we must increase the issuance and use of local government special bonds, expand the scope of investment areas and project capital, optimize the structure of fiscal expenditure, and improve the efficiency of fund usage. More emphasis should be placed on benefiting people's livelihoods, promoting consumption, and increasing development momentum, while firmly guarding the bottom line of the "Three Guarantees" [10] at the grassroots level. Party and government organs must adhere to the practice of "living frugally." Additionally, we must implement a moderately loose monetary policy, leverage the dual functions of monetary policy tools in terms of aggregate volume and structure, reduce the reserve requirement ratio and interest rates at appropriate times, and maintain ample liquidity to ensure that growth in social financing and money supply matches the expected targets for economic growth and the general price level.
The 2024 Central Economic Work Conference [11], when deploying key tasks, placed particular emphasis on vigorously boosting consumption and improving investment efficiency to expand domestic demand in an all-round way. This includes: implementing special actions to boost consumption; promoting income increases and burden reduction for middle- and low-income groups to enhance consumption capacity, willingness, and tiers; appropriately increasing basic pensions for retirees; raising basic pension levels for rural and non-working urban residents [12]; and increasing fiscal subsidy standards for basic medical insurance for rural and non-working urban residents. Furthermore, it involves increasing the strength and scope of implementing the "two news" [13] policies; innovating diversified consumption scenarios; expanding service consumption; and promoting the development of the cultural tourism industry. It also includes actively developing the "first-launch economy" [14], "ice and snow economy" [15], and "silver economy" [16]; strengthening top-down organizational coordination to provide greater support for "two major" [17] projects; moderately increasing investment within the central government budget; strengthening the coordination between fiscal and financial sectors to effectively stimulate private investment through government investment; planning "15th Five-Year Plan" [18] major projects at an early stage; vigorously implementing urban renewal; and carrying out special actions to reduce logistics costs across the whole of society, among others. The implementation of these policies for managing the aggregate and structure of demand aims to increase the total volume and expand the scale of aggregate social demand.
The 2024 Central Economic Work Conference proposed several key tasks: leading the development of new quality productive forces through scientific and technological innovation to build a modern industrial system; leveraging the leading role of economic structural reform to promote the implementation and effectiveness of landmark reform measures; expanding high-level opening-up to the outside world to stabilize foreign trade and foreign investment; effectively preventing and resolving risks in key areas to firmly hold the bottom line against systemic risks; coordinately promoting new-type urbanization and comprehensive rural revitalization to facilitate urban-rural integrated development; increasing the implementation of regional strategies to enhance regional development vitality; and intensifying efforts to guarantee and improve people's livelihoods to enhance the people's sense of fulfillment, happiness, and security. These constitute a comprehensive set of supply-structure management policies aimed at improving the quality of supply. They are necessary to maintain steady economic growth, maintain overall stability in employment and prices, and maintain a basic balance in international payments; they are also important measures to promote the synchronized growth of residents' income and the economy.
Source: Red Flag Manuscript (Hongqi Wengao), Issue 24, 2024 Online Editor: Paul