In 2015, the amount of newly built homes (1,400 sq km) was again bigger than the amount sold (1,300 sq km). It could take five to 10 years to reduce real estate stock to meet the level of demand.

In general, a move toward innovation, which means putting more emphasis on the service sector and high-end manufacturing, could stimulate demand, but it will do little to boost demand in traditional sectors such as construction. For example, 100 yuan ($15; 14 euros) of GDP generated by the construction industry could create 50 yuan in demand for steel, but 100 yuan of GDP generated by the service sector may only create 1 yuan in demand for steel.

So only by reducing supply can we shed overcapacity. If the government makes the decision early, there will be more room to maneuver. If not, more elements will be beyond control.

There are several issues that need to be resolved in this round of supply-side reform:

Reform of administrative management and enhancement of administrative efficiency. China needs a performance-related evaluation of civil servants, and employees at state-owned enterprises and public institutions. The key is to make salaries flexible and remove permanent job security. People who don't work well should be downgraded, while people who do excellent work should be promoted.

Proper expansion of the fiscal deficit, tax cuts and the large-scale release of bonds. In 2015, China's fiscal deficit target was 2.3 percent, well below the international alert level of 3 percent and lower than our own level in 2009 and 2010. So as a next step we can expand the fiscal deficit. There are two ways to do this: one is for the central and local government to release more bonds; another is major tax cuts.