Forget 'Likonomics', it's all about economic stimulus in China again
By using its old trick of spending its way to growth, the mainland runs the risk of falling deeper into its complicated structural problems
When Li Keqiang took over as premier early last year, he quickly became known for an economic plan called "Likonomics". According to some economists, it comprised three main parts: no stimulus, deleveraging and structural reforms. Does anyone remember this? Does Li himself remember this?
More than a year later and it has become apparent that parts, if not all, of "Likonomics" don't really work. As a result, the government has gone back to its old trick of boosting the economy, which - if you ask me - is still called "stimulus".
Last week, the State Council decided at a meeting chaired by Li to halve the income tax for more small enterprises, from the 1.2 million firms currently covered, and extend the policy to the end of 2016 to prop up the private sector and stabilise the job market.
The government also pledged to renovate more shanty towns as part of efforts to boost housing supply for the poor and migrant workers.
Railway construction, particularly in the poorer central and western regions, would be accelerated, supported by a new development fund and railway construction bonds.
These efforts are similar to what happened during the two terms of Li's predecessor, Wen Jiabao. Wen managed to maintain economic growth during his tenure, but he was also largely blamed for creating asset bubbles that put the mainland economy at risk in the long term.
During Wen's premiership, he announced the milestone four trillion yuan (HK$5 trillion) economic stimulus plan, partly in response to the 2008 global financial crisis.
Later, the government guaranteed 10 trillion yuan in loan expansions to help maintain growth. Much of that went directly from the central bank to various infrastructure projects and local real estate investments.
I'm not suggesting Li's stimulus plan could go that far, but once you open the box of stimulus policies, the market will be curious to know what the next round of stimulus might be if the first round fails to maintain growth to meet the 7.5 per cent annual target.
There's no way Li wants to be the first premier to miss the growth target, which would reflect badly in his performance review next spring when the cabinet has its annual meeting.
ANZ's China chief economist Liu Ligang believes economic growth on the mainland in the first quarter could fall well below 7.5 per cent, which may explain why Li suddenly embraced the fiscal stimulus habit to boost the economy.
"But this old-fashioned [method] of recovery will hit a bump again in the middle of the year if the funding costs cannot be cut permanently," said Liu.
In other words, the mainland economy may be in bigger trouble now than in 2008, and neither Wen's big stimulus or Li's mini-stimulus are permanent solutions for addressing the country's complicated structural problems.
It reminds me of a line from the Hong Kong movie Infernal Affairs about good cops and bad cops, which says: "Sooner or later, you will have to repay the cost for what you enjoyed in the world."