A misconception that needs to be cleared up concerns the term “Likonomics,” which was bandied about in the media for a while following the Chinese Communist Party’s (CCP) 18th National Congress in November 2012.
“Likonomics” refers to Chinese Premier Li Keqiang’s (李克強) economic ideas, and its salient features are: no stimulus, deleveraging and structural reform. However, these ideas soon disappeared because the CCP’s traditional leadership model of a “two-horse carriage,” with the general secretary looking after politics while the premier of the State Council takes care of the economy, has been unhitched by Chinese President and CCP General Secretary Xi Jinping (習近平).
Although Li is the one who carries out China’s economic policy decisions and explains them to the public, it is Xi who is making the decisions behind the scenes. That means that there is really no longer such a thing as “Likonomics,” only “Xiconomics,” but even “Xiconomics” has clearly reached the end of the line.
The main feature of China’s economic growth is that it is investment-led. A tide of land development driven by infrastructure construction, along with local and regional governments’ fiscal hunger following reforms to the tax system, has driven investment in real estate and quickly became key economic drivers on a par with infrastructure construction and exports.
Although investment-led economic growth has achieved spectacular results, it also brought no end of problems in its wake. In the medium to long term, the main problems are excess productive capacity, falling efficiency of investment, inefficiency in infrastructure construction and an increase in banks’ non-performing loans.
In this respect, the biggest target for criticism has been the 4 trillion yuan (US$644 billion) fiscal expansion plan implemented in response to the global financial crisis by Li’s predecessor, Wen Jiabao (溫家寶). Although this measure allowed China’s economy to recover at the end of 2009, it also gave rise to new problems, including excessive debts, an overheated real estate market and increased financial risks for local governments.
Since Xi took office, he has been touting the idea of a “new normal” for China’s economic development. The thrust of this idea is to get away from the past model that focused solely on raising GDP and stimulating economic growth, and to gradually get the nation’s economic growth rate to stabilize at a relatively low pace of about 7 percent. It emphasizes adjusting China’s economic structure and strengthening the role of market mechanisms.
These are the basic proposals of Xi’s economic policies, which are markedly different from the previous model of using fiscal expansion to promote economic growth. This “new normal” may sound good, but has the Chinese government really put it into practice?
According to official media reports, China’s producer price index (PPI) has fallen for 34 months in a row, and this trend has come to be seen as the greatest potential risk that could lead to deflation. Actually, this is an old problem and it is more a result of excess capacity and insufficient demand. In Japan’s case, its economy has been struggling with deflation throughout its “three lost decades,” up until today.
China’s experience of fighting deflation is basically that it has got out of the deflationary quagmire by applying relaxed monetary and fiscal policies. So, does Xi offer any new way out? No.
First, infrastructure investment is still being used as the driving force for overcoming excess productive capacity. At the end of last year, the State Council approved infrastructure projects in seven major categories requiring a total investment of 10 trillion yuan, 7 trillion of which is to be invested this year.
Second, beginning in November last year, the People’s Bank of China has lowered interest rates three times in a row and cut banks’ reserve requirement ratio twice in order to stimulate growth in investment.
The third and most recent measure has been to artificially push up stock market indices, which is tantamount to intentionally creating a stock market bubble.
These “three arrows” of Xi’s economic policies are all oriented toward fiscal stimulus. Evidently, “Xiconomics” is just walking the same old path in a new pair of shoes.
The move from “Likonomics” to “Xiconomics” is really a retreat from structural reform back to the old path of using quantitative easing to stimulate economic growth, and it brings “deep reform” to a standstill.
If this trend continues, it will be impossible to resolve the Chinese economy’s longstanding contradictions, and indeed they are likely to keep on piling up.
If this kind of economic stimulus policy could overcome the downward pressure on China’s economy, then all well and good. However, if Wen’s 4 trillion yuan could not solve the problem, can Xi’s 7 trillion yuan fix it? Of course not.
A few days ago, HSBC published its preliminary purchasing managers’ index (PMI) for China for last month. Although the index rose from 49.2 in May to 49.6 last month, it is still below 50, which marks the dividing line between expansion and contraction in the manufacturing sector.
The index has now been signaling contraction for four months in succession, showing that the Chinese government’s loosening of the money supply over the preceding period has had a very limited effect.
A soaring stock market, for its part, gives very little support to consumption. It is estimated that a 10 percent rise in stock market indices can only generate a 0.2 percent rise in consumption, which is a mere drop in the ocean.
All in all, the Chinese economy’s downward trend is unstoppable, and “Xiconomics” has clearly run out of steam.
Wang Dan, an exiled Chinese dissident, is a visiting associate professor at National Tsing Hua University’s College of Humanities and Social Sciences.
Translated by Julian Clegg
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