Likenomics guided by prudence and pragmatism
Andrew Sheng says targets set in areas from jobs to restructuring show his grasp of what's at stake
In the run-up to the third plenum of the Communist Party, Premier Li Keqiang gave an overview of his reform priorities in a lecture at the 16th national congress of the All-China Federation of Trade Unions. It was a lesson in Likenomics 101.
The lecture showed Li's grasp of the technical complexities of the political economy of reform and the daunting task of pushing through reforms at a time of profound transformation at home and abroad.
First, he put jobs at the core of his thinking. To generate enough for 10 million new labour entrants and keep urban unemployment at around 4 per cent, China needs growth of around 7.2 per cent per annum. This year alone, there are 7 million graduates coming into the job market. In the first three quarters of this year, 10 million jobs were created, keeping the unemployment level on target.
Second, he laid out his choices to maintain growth - either use monetary and fiscal policies, or go for structural reforms. He was pretty pragmatic. With M2 money supply already double the amount of the country's gross domestic product and keeping the fiscal deficit below 3 per cent of GDP, his choice is to stick to the current monetary policy of appropriate tightness.
This meant he is opting for structural reforms. In classic Chinese directness, he went straight for the core issue of the relationship between state and market, illustrating this with an example of how a Beijing student returning to his county had to get dozens of approvals and wait months before he could open a bookshop.
In the past six months, his government has done away with 221 administrative approval procedures; in the Shanghai free trade zone area, it has introduced for the first time a "negative list", listing sectors where foreign investment is banned, with no permission required for investing in other sectors. Historically, Chinese officialdom has required approval for everything. In Li's words, the government should let go of what the market can do, and regulate what should be regulated.
To get the market going, especially small and medium-sized enterprises, tax exemption has been given on value-added tax and income tax.
A decision has also been taken to corporatise the huge Railways Department.
Li laid out where he saw breakthrough areas. Chinese online retailing, for one, reached 1.3 trillion yuan (HK$1.6 trillion) last year, a level already reached in the first three quarters of this year. It may overtake US online retailing in size by next year.
He identified retirement and health care as key drivers of the service economy, noting that the Chinese service sector's share of GDP lagged behind other comparable economies by at least 10 percentage points.
Another breakthrough is the opening-up strategy. Li laid out the strategy within the context of building up domestic consumption. Noting that the export sector creates jobs for 30 million people directly and 100 million indirectly, it would not be realistic to switch focus completely onto consumption-led growth.
Thus, China has become strongly for multilateralism and against protectionism. In other words, it will welcome inward foreign direct investment in its home market just as it will continue to promote outward trade and investment.
Li has also incorporated "forward guidance" in his economic management tool box. He will maintain growth expectations at around 7.5 per cent per year, and cap the rise in the consumer price index at 3.5 per cent. He is confident that these growth figures can be achieved, given the huge gap in growth rates between the coastal areas, which are moving into higher middle-income brackets, and the poorer central and western regions.
Top among his concerns is the social security safety net. Currently, 300 million urban workers are members of social security schemes, but this year, 38 million stopped their contributions, because migrant workers stop paying after 15 years of contributions.
Every year, 3 million workers suffer from serious illness. Hence, social security, pension reform and health care reform will receive top priority.
Finally, Li addressed the question of labour income. He reiterated that wage increases must move in step with labour productivity. Overall, he understood that continuous education and skills training lie at the heart of changing labour productivity.
In sum, Likenomics comprises prudent monetary and fiscal policies, with a clear eye on pragmatic structural reforms, which will require cutting back government overregulation and allowing market forces to work.
Keynesian economics assumes the markets will work as long as the macro is right; neoclassical economics assumes the macro will work as long as the micro is right. Likenomics tackles micro, macro and structural problems at the same time. That is no easy feat.
Somehow, I think Keynes and Schumpeter would have approved of these reform objectives.
Andrew Sheng is president of the Fung Global Institute