News Analysis: Likonomics

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Li Keqiang’s economic reforms are being dubbed ‘Likenomics’, but the success of any economic reforms in China hinge on doing away with embedded old practices within the top echelons of the country’s bureaucracy, writes Willy Lam.

 
First there was Abenomics, a reference to unorthodox steps taken by Japanese Prime Minister Shinzo Abe to resuscitate the Japanese economy through quantitative easing.
 
Then this past month or so, the world’s gaze has been focused on Likonomics – or rather the market-oriented policies associated with China’s new Prime Minister Li Keqiang. Whether the 58-year-old Li, dubbed the country’s “first Ph.D. Premier,” can breathe new life to reforms is key to the viability of the world’s second largest economy.
 
According to the official Chinese media, Likonomics simply means using market-oriented measures to replace old-style administrative fiats, which tend to favor China’s vested interest blocs.

Since the on-set of the global financial crisis in late 2008, the State Council or cabinet has been relying on financial injections and credit expansion to ensure the requisite GDP growth rates.

 
The biggest beneficiaries of such monetary injections have been state-owned enterprises, which are not noted for their efficiency. Worse, because state banks tend to spurn private firms, a huge shadow banking system has emerged. While Chinese cadres and official economists have scolded the profligacy inherent in the QE programs in the U.S. and Japan, debts owed by different levels of Chinese administrations, state-backed finance vehicles and other investment entities are estimated to be double the country’s GDP.
On June 20, however, Li and his finance team signaled its readiness for major surgery by allowing the interbank borrowing rate to spike to an unheard-of 13.44 per cent. (The usual rate is around 3 percent). While the People’s Bank of China (PBOC), China’s central bank, indicated six days later that it would resume normal lending, the Li team has impressed foreign observers by its willingness to break with past practice.
 
Li has made it clear his cabinet will not pump liquidity into the market to prop up infrastructure and other job-creation programs; moreover, the shadow banking system, which is partly responsible for the country’s housing bubble, will be disciplined.
 
“While the economy faces many difficulties and challenges, we must promote financial reform in an orderly way to better serve economic restructuring,” said a recent statement from the cabinet.
 
At the same time, Li, who is just behind President Xi Jinping in the Chinese Communist Party Politburo pecking order, is working on a major economic liberalization manifesto to be unveiled at a CCP Central Committee meeting scheduled for autumn. There will be reforms in areas including the financial system; credit policy and taxation; land ownership; liberalizing the prices of utilities and staple goods; trimming bureaucratic reviews; narrowing the income gap between rich and poor; and liberalizing the household registration system.
 
Whether Li can succeed in retooling China’s unwieldy economic structure – and the bureaucratic system that is running it – depends on the following factors. One is support from the party-and-state apparatus headed by President Xi, who is also CCP General Secretary.
 
While Xi seems to back Li’s economic reforms, the 60-year-old head of state must also ensure that different factions in the party – as well as the major clans at the topmost echelon of the party – are willing to at least acquiesce in Li’s reforms.
 
Secondly, as prime minister, Li has no direct control over China’s 120-odd SOE conglomerates, which include Fortune 500 companies such as Sinopec, China Mobile, the State Grid, and Industrial and Commercial Bank of China. For the past decade or so, these behemoths have grown big due to their easy access to cheap and abundant credit. Li has to demonstrate more control over the heads of these conglomerates, who are either former ministers or princelings (offspring of party elders). Even more significant is the fact that areas where these conglomerates enjoy monopolistic status, ranging from oil and gas to financial services, should be opened up to private as well as foreign enterprises.
Thirdly, Li has to render the central-government structure more into line with global practice. For example, the PBOC should become more of an independent central bank that is less susceptible to political influence. The National Development and Reform Commission – which is the State Council’s most powerful planning and execution agency – has to beat a retreat from areas which are best regulated by market forces.
 
Last but not least, Li has to crack the whip on regional administrations and their quasi-governmental investment vehicles. In the past decade, too many municipal and county governments have used government funds – as well as money raised through reckless borrowing – to speculate in the housing market. However, very few cadres have been penalized for dereliction of duty and outright corruption.
Li has in his first 100-odd days in office demonstrated that he has the toughness and perspicacity that people have associated with former prime minister Zhu Rongji. Whether Likonomics will succeed in kick-starting another era of reform, however, hinges on the Xi-Li administration’s determination to do away with practices that oil the wheels of the party’s most influential power blocs. 

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