China's Production Cut Policies Lead to Corporate Contraction and Job Losses

Strong Measures Against Malicious Price Competition and Unfair Practices
Tighter Regulations on Online Platform Companies
Negative Impact on Private Sector Activity... Side Effects Include Job Losses

On July 11, LS Securities released a report titled "China: Can Production Cuts Continue?" The report analyzed that the Chinese government's production cut policies, aimed at curbing oversupply, are causing a contraction in private sector activity, which in turn is leading to side effects such as reduced employment and lower wages.

Currently, China continues to experience deflation (a decline in prices) despite the government's active liquidity supply and economic stimulus measures. The causes of deflation include a deterioration in consumer and business sentiment that is even weaker than actual economic conditions, but also a severe oversupply in various industries. Oversupply occurs when production significantly exceeds demand, which creates downward pressure on prices and triggers price competition among companies.

Recently, the Central Financial and Economic Affairs Commission of China announced strong measures against vicious price competition and unfair competition. The commission previously declared the "supply-side reform" at the end of 2015, so the latest measures are being referred to as "Supply-Side Reform 2.0." Supply-Side Reform 2.0 is expected to be implemented in a more sophisticated manner than before. Rather than large-scale administrative production cuts as in the past, the focus is likely to be on qualitative improvements, such as strengthening environmental standards, upgrading technology, and the gradual elimination of inefficient facilities.

While the previous supply-side reform mainly targeted upstream (raw materials and intermediate goods) industries centered on state-owned enterprises, Supply-Side Reform 2.0 includes not only upstream but also downstream (finished goods and services) industries. Downstream industries have a high proportion of private companies and employment, so if administrative production cuts are enforced, the shock to the labor market could be significant. During the process of industrial transformation, both the scale of employment and wage levels tend to decline. Baek Gwanyeol, an analyst at LS Securities, stated, "The important point is that, since the downstream industries have a higher proportion of private companies and employment, if the Chinese government enforces administrative production cuts as it did in the past, the recovery of the labor market could be delayed."

Meanwhile, the Chinese government has recently made significant amendments to the Anti-Unfair Competition Law to strengthen regulations in various areas, including online platforms, data, and brand protection. While this helps to improve market order, it also brings side effects such as a contraction in corporate activity and a deterioration in investment sentiment.