All eyes on Premier Li's new fine-tuning policy

AFTER three decades of double-digit rates of high growth, China's economy is set to decelerate. Growth last year came down to only 7.8 per cent, the lowest in more than a decade.

This downtrend was carried forward into this year as China saw its growth in the second quarter slide to 7.5 per cent, the lowest point since the 2008 global financial crisis.

With domestic conditions still unfavourable and external conditions for growth not much improved either, China's economy runs the risk of a hard landing. Its present economic slowdown already has serious ramifications for many regional economies.

All eyes are on China's new Premier, Mr Li Keqiang. Under the country's existing political and administrative structure, the State Council, which Mr Li presides over, is supposed to be a kind of "economic Cabinet", taking charge of day-to-day economic affairs while President Xi Jinping deals with the even more important political and ideological matters and foreign policy that affect the nation as a whole.

Thus, observers and scholars are closely watching how Mr Li himself takes to China's rapid economic deceleration and what kind of policy remedies he will bring about to arrest further economic slowdown.

Going for a smooth transit

THE leadership has already accepted the inevitability of China's lower growth. It also realises that maintaining China's past double- digit hyper growth is just economically, socially and environmentally unsustainable.

But the government wants a smooth transition to the lower growth regime, with reasonably strong growth of 7 to 8 per cent a year through this decade, so that China can avoid the so-called "middle-income trap" in order to finally become a developed economy by 2030.

However, by the middle of this year, China's economic deceleration seemed to have continued unabated, evidenced by the poor performance of several key indicators, for example, export growth in June was negative (-3.1 per cent) and the purchasing managers index (PMI) for manufacturing production had further declined to 50.1. June's credit crunch had also hurt the overall sentiment.

Signs of the weakening employment outlook might have been the last straw. China has not yet faced unemployment problems; but hiring intentions have plummeted because of slower manufacturing activities.

China's universities are churning out seven million graduates this year, and many will face unemployment (frictional unemployment) due to job mismatching. Slowing economic growth will certainly worsen employment prospects for these new entrants to the labour force.

Red line now crossed?

CHINA'S present economic slowdown has apparently crossed the "red line". Accordingly, observers have been eagerly waiting to see the action plan from Mr Li, who has a PhD in economics from Peking University.

Though his original academic training was Marxist- oriented economic philosophy, he has certainly picked up a lot of modern neo-classical economics on the job.

Earlier on, as China's economic growth was fast losing momentum, Mr Li had made it clear that the government would refrain from applying massive stimulus measures that his predecessor, Mr Wen Jiabao, had employed during the global financial crisis.

Instead, Mr Li would concentrate more on improving the micro- economic efficiency of the economy and pushing for more structural reforms.

His policy package thus includes cutting taxes, liberalising the interest rate, deleveraging China's over-exposure to credit and debt, extending policy support directly to small and medium enterprises, removing red tape and streamlining relevant policies to promote exports, and so on.

A new coinage: Likonomics

TO CHARACTERISE Mr Li's economic policy, Chinese economist Huang Yiping has coined the term "Likonomics", much in the manner as Japanese economists have the label "Abenomics", named after Prime Minister Shinzo Abe.

Technically speaking, there is no such thing as Likonomics or Abenomics. Both are populist journalistic terms.

Both refer to a distinctive policy package that is specifically designed to deal with the economic crisis in their respective countries. The ultimate test of the validity of Likonomics and Abenomics is their empirical relevance and final policy outcome.

Back in 1980, United States President Ronald Reagan, wanting to change Keynesian-type macroeconomic demand management, advocated his supply-side economics, based on cutting taxes (for the rich) and increasing spending (for the military).

This gave rise to the term "Reaganomics", later dubbed "Voodoo Economics", ironically by his Vice-President George Bush, Sr. Mr Bush did not think this policy would bring about a balanced budget.

Whether Likonomics and Abenomics would also fall into similar disrepute does not depend on their conceptual rigour or theoretical coherence. Ultimately, this depends on whether they finally work for China and Japan. In Mr Deng Xiaoping's familiar dictum, they need to "seek truth from facts".

Specifically for Mr Li's new policy package, what is most remarkable is not about how he has avoided the previous policy shortfalls of Mr Wen, but his due recognition of how greater micro-economic efficiency and more structural reforms are fundamental to macroeconomic balance - arguments quite close to the economic idea known as the Rational Expectations School.

Macro-economic fine-tuning

ABOVE all, Mr Li has finally learnt the techniques of macro-economic fine-tuning, relying purely on market levers to manage the economy. It has taken China three decades to come to this.

China's economic growth path since 1979 was full of ups and downs, particularly in the 1980s, which saw three reform cycles in 10 years. China was then a half-reformed economy with dual- tracked prices.

There were no automatic stabilisers as found in a normal market economy, and the government had to rely primarily on direct administrative measures and price controls to maintain macroeconomic stability.

Hence the oft-repeated occurrences in China's macro-economic scene: Yi-fang jiu-luan, Yi-luan jiu-shou, Yi-shou jiu-si. (Liberalisation leads to upsurge and chaos; chaos calls for restraint and braking; and this brings the economy to a screeching halt). Mr Deng himself was often frustrated by such a chaotic development pattern.

Through the 1990s, then Premier Zhu Rongji still primarily depended on administrative measures for his macro-economic controls, although he had begun to use some market measures.

During Mr Wen's term, China's economy had become more extensively marketised. But Mr Wen preferred to leverage high growth on extensive credit and loans, instead of relying on the normal monetary and fiscal policies.

Mr Li's use of macro-economic fine-tuning truly marks a new departure in managing China's economy. It will bring stability to China's future economic growth, which will not be accompanied by the big swings of the past.

This is much in line with what he has announced as the key policy objectives for this year: stable growth, structural adjustment and further reform. But then, he may also end up as China's first premier without a dazzling record of double-digit rates of growth.

stopinion@sph.com.sg

The writer is a professorial fellow at the East Asian Institute, National University of Singapore. By Invitation features expert views from opinion leaders in Singapore and the region.

 

 


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