China Economy

Dawn of 'Lionomics' promises new era of prosperity for China

Richard Harris says the new liberalised policies dubbed 'Lionomics' promise to be a potent force, delivering more prosperity for the people and powering China to new heights

PUBLISHED : Monday, 20 May, 2013, 12:00am
UPDATED : Monday, 20 May, 2013, 1:52am

China is formulating a new set of economic policies designed to support an economy that is growing at an astounding 7.7 per cent per annum, with inflation in single digits and acceptable unemployment. These new policy options will become known as "Lionomics" - the economics of Premier Li Keqiang .

An economy measured in those terms is not naturally regarded as being ailing - but China's transition from a very high-growth to a mature economy requires support. As the world's second-largest economy, China can no longer be described as emerging. It may be young, it may be growing fast, it may have an export-led economy; but it is no longer emerging.

Li is committed to pushing wealth down the economy, forcing it down rather than through trickle down

Simple maths tells us that 1.3 billion people cannot grow at 10 per cent a year indefinitely without overpowering the planet. President Xi Jinping said recently that the days of "ultra-high-speed growth" were over and no longer desirable. Li is tasked to deliver manageable debt, low inflation, steady growth and a strong currency. This new leadership has plenty on its plate.

Xi is encouraging the ideal of the Chinese Dream - the pursuit of co-operation by inspiring a revival of pride in the country. But Li has to deliver the American Dream - of wealth and prosperity. Hard policies are as yet few, but the recent State Council statement gave a few hints of the main thrust of Lionomics. He has set the scene for as bold a reform in the economics agenda as ever in China's history.

Lionomics concentrates so far on two major areas of economic policy. The first is a surprising commitment to relax the capital account. In simple terms, this means relaxing the controls leading to the free floating of the renminbi. I have long argued that one of the quickest ways of doing this is to combine the Hong Kong dollar with the offshore renminbi to produce a "stepping-stone currency". In the meantime, Lionomics means widening the bands that collar the renminbi's value to the US dollar. Relaxing currency controls would enhance China's credibility on the economic world stage that even its very size cannot do alone.

Lionomics is also hinting that interest rates will be set by the market. This would mitigate profligate, corruption-inducing spending on state-sponsored projects and would make the use of capital more efficient. Easing capital controls would allow easier investment by Chinese overseas - and by implication the reverse.

The second major thrust of Lionomics is deregulation of the archaic approval system. This would not only increase economic efficiency but would reduce systemic corruption opportunities.

This hint from the State Council indicates that Lionomics is sailing deliciously close to supply-side economic reform, which seeks to lower the barriers to economic activity. China's waxy, regulation-bound economy is ripe for freeing up; increasing productivity and reducing the cost of making goods and services by increasing efficiency and removing hidden, wasted costs.

Thatcherism released a great deal of supply-side economic energy by privatising state-owned industries in Britain, moving the responsibility of growth from bureaucrats to incentivised business managers. Being privately owned will make it easier for Chinese companies to expand overseas. The Communist Party might be close to this move - for, in today's marketplace, top-down regulation controls the economy, not share ownership.

The supply-side wish list includes simplifying the tax code, drafting modern bankruptcy and company law, and relaxing the hated hukou system, which will minimise labour exploitation and increase the renminbi in the ordinary worker's pocket. Premier Li is committed to pushing wealth down the economy - by forcing it down rather than through trickle down.

Lionomics does not want to be known for wasting money supporting declining industries. It does not want to follow Abenomics down the money-printing route, for there lies the way to debt addiction and disaster. Lionomics must reform the local government financing system, which lent as recklessly as a Greek bank to a Spanish golf course developer. It might include judicious infrastructure spending, relieving gridlock in Beijing and other major cities, cleaning the environment and building low-cost housing for those millions who cannot afford private apartments. All of these actions would make the economy work better.

We are merely at the dawn of Lionomics but, if the premier can execute, it will be a potent force. The successful development of the biggest economy in the world will have a historical impact on us all. That alone means that we will be hearing much more about Lionomics.

Richard Harris is the chief executive of Port Shelter Investment Management