According to recent figures from the National Bureau of Statistics, in October, the consumer price index, which gauges the overall cost of living, grew 2.1 percent in China, which was 0.2 percentage points higher than that in September. Furthermore, the producer price index, a measure of prices at the factory gate, rose 1.2 percent, which was 1.1 percentage points higher than a month ago. The increases indicate that the supply-demand scenario is improving, which will help stabilize market expectations and alleviate the pressure of deflation. However, the prospect of a price hike will raise costs for the real economy. In October, the purchasing price index for industrial products climbed 0.9 percent on both a yearly and monthly basis.

Previous figures also indicated that the real economy is facing the possibility that costs may rise. Since June, the purchasing price index for the manufacturing industry, a sub-index in the purchasing managers' index, has shown an uptrend. In October, the index stood at 62.6 percent, which was 5.1 percentage points higher than that in the previous month. Surveys showed that in October, 26.5 percent of the surveyed enterprises said they were suffering an increase in the price of raw materials, up 4.7 percentage points than a month ago and the highest since April 2013. Some enterprises complained that the prices of coal, coke and plastic raw materials have jumped rapidly, causing more and more costs. In addition, the number of enterprises claiming growing transportation expenditures has also expanded.

Simply put, the figures indicate that when market supply and demand becomes more balanced, the real economy has to shoulder more costs due to an increase in the price of raw materials, as well as other factors. This might lead some companies to see their profits remaining unchanged despite increased output, puncturing corporate expectations and confidence. Such an effect is unfavorable to the recovery of the real economy and the improvement of China's economic vigor.

The Central Government has designated reducing corporate costs as one of the five key tasks of advancing supply-side structural reform this year. According to a working scheme issued by the State Council, China's cabinet, corporations' profit margins will be significantly increased in the next three years as a result of lower operational costs. In the first three quarters of this year, among industrial enterprises whose annual sales revenue is above 20 million yuan ($2.89 million), the cost incurred through every 100 yuan ($14.45) of sales revenue was 85.87 yuan ($12.41), which was 0.17 yuan ($0.02) lower than a year ago.

In addition to taxes, corporations must also deal with costs related to financing activities, transactions, labor, energy consumption and land. Reducing the impact of those factors on the real economy cannot be done overnight. The government must use a better combination of measures to streamline the relationship with the market, especially as limits imposed by labor supply, resources and the environment are increasingly restraining economic growth.

If the government is to tackle this issue properly, it must take both temporary and permanent measures. It should both formulate targeted policies to alleviate immediate problems and deepen reforms in order to create a better business environment and solve deep-rooted causes regarding this matter.

Related government departments should continue to reduce corporate tax burdens in an appropriate manner, further expanding the pilot program to replace business tax with a value-added tax. They should also properly implement the policy of super deductions for research and development expenses and call off various unauthorized charges, in order to create a fair taxation environment.

Efforts should be intensified to streamline administration and delegate more power to lower-level authorities, improve the government's provision of public services, and significantly reduce the number of intermediary services required to gain administrative approval. The government should also implement a fair competition review system and take steps to establish a national negative list of restricted and prohibited sectors for market access, in order to help companies reduce transaction costs.

Notably, it is important to continue a prudent monetary policy, maintain reasonable and ample liquidity, increase the proportion of direct financing, and reduce procedural expenses of bank credit. Moreover, financial institutions should increase long-term, low-cost lending and intensify their disposal of non-performing loans.

All companies should also seek to fully tap into their potential and improve productivity and management through innovation and lean production methods. They should make full use of the new generation of information technology and other technologies, appropriately control labor costs, and upgrade their management and marketing models to improve profitability. They should also boost environment-friendly manufacturing and significantly reduce their consumption of resources and energy to reduce costs and improve efficiency.

This is an edited excerpt of an article published in Economic Daily

Copyedited by Bryan Michael Galvan

Comments to zhouxiaoyan@bjreview.com