Monday, August 26, 2013

What is Likonomics: Calls For Deeper Economic Reforms

Likonomics (also called Lionomics or Liconomics) is a new economic term to describe the deeper economic reforms directed by China State Council Premier Li Keqiang Administration.

What is Inside Likonomics?

By definition from Barclays Capital, Likonomics contain three pillars for Chinese macroeconomic policies. They are: (1) no more stimulus, (2) de-leveraging, and (3) structural reform respectively. We, Mr China, would like to share with you about our thoughts on these three pillars, as follow:

Three pillars of Likonomics

(1) No More Stimulus.

Unlike Abenomics stimulus measures in Japan, Likonomics in China is equivalent to zero (at least very limited) fiscal or monetary stimulus from central government. China State Council Premier Li Keqiang already mentioned on May that PRC (People's Republic of China) has very little room for extra government-directed investment or monetary stimulus. We, Mr China, trust that suspending stimulus (i.e.: rebalancing) is now necessary because the previous RMB 4 trillion stimulus plan since 2008 global financial crisis has already induced a serious problem of excessive capacity in various Chinese industries. Before success in structural reform (see pillar #3 below), we believe that any more governmental stimulus will only worsen the existing problem of excessive capacity.

(2) Deleveraging.

Credit ratio in China has recently reached an alarming level, as the growth rate of credit loans has been faster than that of GDP. Premier Li Keqiang, who uses 'Keqiang index' to measure PRC economic performance, is determined though his Likonomics to reduce this credit ratio. Since national bankers have been relying too much on unlimited liquidity supply from PBoC (People's Bank of China) for supporting their too-aggressive lending business expansion, policy makers have started to discipline all these national lenders by creating the recent money storage problem in money markets. In particular, PBoC suddenly shut down its liquidity supply in June, thus causing the benchmark Shanghai overnight repo rate, 7-day and overnight SHIBOR (Shanghai Interbank Offered Rate) etc hit their historical highs.

After this sudden credit crunch occurred in Shanghai interbank markets, national bankers have all been aware that there is no more easy money for over-lending now. National bankers now start caring more about risks on their own lending business. With enhanced risk management measures on credit loan business, the overall credit market discipline can thus be strengthened. On the contrary, we believe that any more uncontrolled credit pump to the money market before success in structural reform (see pillar #3 below) will only worsen the existing problem of over-lending in PRC credit market.

(3) Structural Reform.

Structural reform is the most crucial part for Likonomics as proposed by Premier Li Keqiang. Although cutting government-directed stimulus (i.e.: rebalancing) and reducing credit ratio (i.e.: deleveraging) may trigger downside risk of asset prices or cause short-term economic slow down in China, this is a necessary preparation step for Chinese banking system reform which can lead to better control over shadow-banking activities, can avoid potential asset bubbles, and can also accelerate capital-account or interest-rate liberalization. Structural reform on microeconomic policies should also include reducing administrative controls on utility prices, promoting domestic consumption, facilitating better use of land resources, lowering monopolies by SOEs (State-owned Enterprises) and supporting SMEs (Small-and-Medium-sized Enterprises) development etc. Only by making these Likonomics changes, PRC (People's Republic of China) can start stepping out from the current economy stage that relies too heavily on exports.

Likonomics For Deeper Economic Reform

In all, the whole idea of Likonomics policy is to call for deeper economic reform, to ensure sustainability of PRC economic growth and to put Chinese economy back to the right track. The significance of Likonomics is all about maintaining longer-term positive Chinese economic outlook under sustainable growth path. Likonomics simply allows short-term economic pain in exchange of longer-term economic gain.

Nevertheless, there are still concerns by some economists for any overaggressive rebalancing (i.e.: cutting government stimulus) or deleveraging (i.e.: lowering credit ratio) process orientated from Likonomics can do more harm than good. As PRC still maintains a considerable current-account surplus (i.e.: it earns more than it spends), Chinese supplies can easily exceed its domestic demands. PRC consumer price index (CPI) stays at a relatively low level and producer price index (PPI) still continue to drop, which means that foreign and domestic demands combined have not put enough pressure on producer resources and thus can hardly push up consumer-level inflation. Therefore we, Mr China, agree that any rebalancing or deleveraging process cannot be too aggressive because a stable transition towards deeper economic reform is still absolutely necessary for PRC.

After all, Likonomics implementation is by no mean an easy one in Chinese economic reform history. To overcome all structural problems lasting for years since 1978 market opening-up, Likonomics should require a relatively stable economic environment to facilitate its new era structural reform for bigger long-term success.


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