Growing trouble

Likonomics faces first test as economy slows


Li: man for a flagging economy?

Is he a talker or a walker? That was the query in The Economist magazine earlier this year when Li Keqiang was promoted to his new role as Chinese Premier. The question came at the end of what many are now defining as a ‘lost decade’ for economic reform under the stewardship of Li’s predecessor, Wen Jiabao, who seems to have preferred talking about change rather than implementing it.

Even Li seemed to hint as much during his first press conference after promotion, suggesting that “screaming yourself hoarse” was not as good as “rolling up your sleeves and getting to work”.

So has Li been getting to work as promised? After only a few months in office, his name is already synonymous with a reform agenda: Likonomics, which is said to signify a step back from stimulus as a means for juicing up growth; a determination to slash debt in the financial sector; and a readiness to oversee structural change, even at the expense of short-term economic pain.

There have been some early signs of action too, especially in June, when the central bank sat on the sidelines as the financial sector sweated its way through a mini-credit crunch. It then intervened to improve liquidity but one interpretation was that Li was sending a message to the banks that they needed to lend more responsibly (see WiC199).

Despite this, the notion of Likonomics has been pooh-poohed by some, who point out that the phrase was coined by an international investment bank and that there has been no official word from Beijing about the term or its meaning.

Even so, some of the Chinese newspapers have been discussing Likonomics as if it does have more formal status (“An economic reboot”, the Global Times declared, while the China Daily headlined its coverage as “The way ahead”).

Others say it is too early to draw specific conclusions on Li’s economic strategy and that we must wait for a key meeting of the Communist Party in October to see whether more details will be released. Similar to the criticism of Wen Jiabao, another question is whether talk will be followed with sustained action. Opposition to reform is likely to be substantial, especially from those who make their living cutting deals on China’s current economic model. Li himself has alluded to the challenge ahead, telling journalists in March that “stirring vested interests may be more difficult than stirring the soul”.

Likonomics may also get the boot if growth slips below the 7% baseline that most analysts are now classifying as “hard landing” territory. Hence news at the end of July that the State Council has approved a “mini-stimulus” to counter a slew of slowing indicators for the economy was soon being seized upon as a sign of Li losing his nerve. “Once again, China faces a dilemma,” one editorial in the Economic Observer acknowledged. “Keep GDP growth going according to the current model and risk making things worse in the long run, or fundamentally restructure the economy?”

Others argue that Li is trying to find a middle way. Accordingly, he has presented the mini-stimulus (tax breaks for small businesses, reductions in export fees and a pledge to speed up railway construction) as different to the economic boosters before it. The State Council also made clear that the goal is to “arouse the energy of the market”, as well as help small, privately-run firms rather than their state-owned peers. One of the core components of the plan saw Beijing scrap business and sales taxes for six million firms with monthly revenues of less than Rmb20,000 ($3,250).

The latest round of investment for the railways was also given a market-reform slant, with the proviso that the new fund will seek money from private backers, rather than rely solely on the public purse.

“[The State Council] agreed that more efforts should be made to create a fair, open and convenient market environment, motivate market players and enhance construction in weak areas of the economy, so as to ensure that the economy can develop in a sustainable and healthy way,” the statement advised, according to Xinhua.

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