Li Keqiang

Reform, relaxation and balance are key pillars of Likonomics

Richard Harris says Li Keqiang's tough measures could bring a fairer distribution of wealth

PUBLISHED : Tuesday, 30 July, 2013, 12:00am
UPDATED : Tuesday, 30 July, 2013, 3:54am

The easing of controls on interest rates this month is one of the most important Chinese economic reforms since Deng Xiaoping went to Shenzhen in 1992 to reinforce the message that "to get rich is glorious".

The correct pricing of money permeates throughout a modern economy and forces the efficient use of capital. The initial reforms are modest but are as irreversible as squeezing a tube of toothpaste.

This policy change stems from Li Keqiang , a man who once defied his homebody father to graduate with a PhD in economics from Peking University and who is now defying China's entrenched traditionalists. Official sources claim the premier to be against "formalism, bureaucratism and hedonism". He takes meetings of the State Council in an open-necked shirt. These new party leaders are not time-servers - they are reformers and are not afraid to upset the status quo.

It was reported in the South China Morning Post that in a meeting earlier this year, Li slammed his fist down on the table at the intransigence of government officials against his reforms. This report is probably a controlled leak but it is also a sign of his determination.

An easing of regulatory approvals, already happening, will reduce costs

The creative policy mix by which Li is seeking to deal with China's unique economic circumstances is termed Likonomics. To deliver manageable debt, low inflation, steady growth and a strong currency will need a strong change leader; like a Reagan, or a Thatcher, or perhaps a Li. This development of "capitalism with Chinese characteristics" can be summarised as "reform, relaxation and rebalancing".

The first pillar of Likonomics is reform of the economy's archaic structure. Li has chosen the path of austerity to force the system to reform and toughen up the economy. Austerity will trim the bloated state-owned industries, increase productivity through "natural selection", and ready the banks to compete globally.

The premier has an electoral cycle of 10 years within which to plan and so can survive the political consequences of a short, tough period in return for a long sustainable recovery.

Policies of tightening liquidity, clamping down on house prices and restricting state-funded entertainment target the capital-rich and push the wealth downstream - and are fundamentally popular with the masses. Newly announced reforms to support small business include the elimination of tax for the smallest.

Pillar two of Likonomics is the relaxation of the plethora of confusing and conflicting, archaic and outmoded rules and regulations that scourge modern China. An easing of regulatory approvals, already happening in many sectors, will reduce wasted costs. It would also diminish systemic corruption opportunities - a major target of President Xi Jinping .

The Shanghai free trade zone - a massive relaxation of regulation - is highly popular with salivating city officials, but less popular with the entrenched interests of the regulators. Relaxation of customs procedures were also announced last week.

The almost daily removal of restrictions on the global trade of the renminbi is an indication of wider measures to come to relax cross-border capital movements. This will attract foreign investment and perhaps assist Chinese investment overseas. The relaxation of interest-rate controls is essential in a modern economy, making it a better user of resources and may deflate the burgeoning shadow banking system.

Third, Likonomics is steering a rebalancing of an economy in transition from high growth to one more sustainably mature. The Chinese economy is dominantly dependent on demand from the developed markets and the leadership needs to use this crisis to accelerate the transition to a domestic-led engine of economic growth.

The minimum wage policy will surely be further extended to help close the wealth gap between rich and poor and lift domestic private consumption.

Li's official economic policy is to rebalance growth such that inflation is mitigated; to ensure stable growth at 7 per cent, with acceptable inflation at 3.5 per cent.

At present the mainland press fret that the reverse outcome looks more likely, but with Likonomic policy initiatives being announced almost daily, that worry is likely to be calmed.

Likonomics is very important to Hong Kong, by increasing the volume and efficiency of economic activity - but it will also threaten, as a Shanghai free trade zone will cannibalise domestic financial and commercial business from the SAR.

Yet, Hong Kong will continue to eat its full slice of the cake, being a unique enclave within China with the rule of law, freedom of speech, and the key feature of not actually being the mainland.

Likonomics as a philosophy is developing daily; but if he continues these reforms, he may well deliver the American Dream as well as the Chinese Dream - not just a wealthy but also a more uniform society.

Richard Harris is chief executive of Port Shelter Investment Management