Wu Jinglian, one of China's most respected economists, said a market-oriented mechanism will be needed to implement China's supply-side structural reform.
In an article on the flagship People's Daily published on Thursday, Wu said China will need to stick to its adoption of the market principles and continue the reform on the rule of law to create better environment for innovation, which will be key to rejuvenate the supply-side.
"China need to encourage innovation from a fundamental level instead of focusing on specific technologies or operating strategies, or giving enterprises subsidies," said Wu, now serving as researcher of the Development Research Center of the State Council, a government advisory.
"If you continue to give subsidies to particular enterprises, it will result in unfair market competition," Wu said.
China has vowed to address the country's emerging problems such as excess capacity, housing overhang, and poor-performing state-owned enterprises through the "supply-side reform," a latest phrase coined in China to tackle the economic slowdown.
Wu agreed that reforming the supply-side will be a wise strategy as traditional investment-driven demand-side stimulus has left China with many side effects such as low return of investments and high leverage ratio on the country's balance sheet.
The key to supply-side reform, Wu said, is to increase the efficiency of companies.
"The key factors that affect the supply side are additional capital, additional labor force and better efficiency," Wu said, "Considering the circumstance of China, the most important is to raise efficiency."
Wu, known as the Mr. Market, is best known for his consistent support for a market-oriented economy and his proposal for a "socialist market economy" to Chinese leaders in the 1990s.
