A worker is pictured in Shougang Jingtang United Iron & Steel Co on Aug 28, 2014. [Photo/Xinhua]

China is pushing supply-side reform at a time when its economy faces the pressure of overcapacity and structural adjustment. In fact, supply-side reform is essential for China's economic restructuring.

The core of supply-side management is to make enterprises the main bodies of supply. Enterprises supply products according to the efficiency principle, as well as the input and output principle. If supplying some kinds of products or services is good for an enterprise, it will supply them－if not, it won't. And if producing new types of goods is not profitable, the enterprise will terminate their production to prevent losses. This means enterprises ought to compete and be driven by innovation, and those that fail to do so have to exit the market.

Vital to a healthy market order and economic development is the fact that enterprises should supply on the basis of their own situations. This, in turn, means enterprises should not only be healthy but also abide by market principles. Real enterprises are dependent on the market: If their products are not accepted by the market, they will suffer losses. Therefore, real enterprises are determined by their long-term, not short-term, behaviors.

This is to say that the authorities should avoid directing industrial development with administrative orders. On some occasions in the past, fiscal stimulation was used to maintain a high economic growth rate. But it caused serious side effects of overcapacity and misallocation of resources.

For small bodies, governments often do not have sufficient access to necessary information and know-how. So they should refrain from excessively interfering in the micro-economy.

According to the laws of economics, governments and enterprises have different roles to play in the market, and a government should not play the role of an enterprise. Many government officials tend to improve their political performance by allocating resources for sectors they believe will boost the economy. But only when market forces play the decisive role in resource distribution can supply-side reform really succeed.

To allow enterprises to be the main bodies of supply, we need a sound market economy system, which includes the mechanism to stimulate innovation in order to improve the industrial level and the market-exit mechanism－applied through, say, mergers, bankruptcy and reorganization.

The market-exit mechanism is aimed at eliminating outdated and low-level overcapacity accumulated during the rapid economic development period. With the support of the social security system, the exit mechanism could play its assigned role whenever required to prevent serious accumulative structural problems. But for that, the government needs to abide by the laws of market economy instead of ignoring them. In a sound market system, the phenomenon of undersupply of a certain product while there is an oversupply of another cannot last forever.

China is earnestly pushing ahead with supply-side reform, but the structural problems accumulated over a long period can hardly be solved overnight. It will take a long time to explore the new market, develop new value-added products and eliminate overcapacity.

In this regard, the authorities should create conditions for enterprises to become the main players in the market and build a sound market economy system through reform. It is advisable to allow the market forces to lead the supply-side reform.

The author is a professor of economics at Renmin University of China.