The Myth of China’s Economic Reform

The Myth of China’s Economic Reform

Can we please have a moratorium on the word “Likonomics”? Premier Li Keqiang’s plans to overhaul the Chinese economy have hardly earned such a grand moniker yet.

Say what you will about “Thatchernomics” or “Reaganomics,” but Margaret Thatcher and Ronald Reagan fundamentally altered the British and American economies. No one is rolling their eyes at “Aquinomics,” President Benigno Aquino’s thus-far successful prescription for the Philippines, the onetime “sick man of Asia.” By contrast, Likonomics is a ridiculously premature nod to ideas that are, at best, still on the drawing board and might never come off it.In Japan, economists and a cheerleading media now seem to realize they bought into “Abenomics” too hastily, creating the myth that Prime Minister Shinzo Abe’s revival plan is succeeding when it has only just begun. Game-changing reform efforts take several years to implement. We are a long way from knowing if Li has the skill or political will to manhandle China onto a more sustainable growth path, led by domestic demand.

How will we know? There are three clues to whether Likonomics is more than a hollow slogan.

First, can Li avoid further stimulus? The premier’s supposed shock-therapy program already has its own myth: that China is engineering a sharp slowdown. Li doesn’t WANT growth to slide toward 5 percent — no Chinese leader in his right mind would at a time when protests are becoming commonplace. Rather, China’s export- and investment-led growth model is burning out on Li’s watch.

Magic Wand

Well before Li and President Xi Jinping officially took the reins in March, exports were falling, manufacturing was contracting and economists were downgrading forecasts. Big reforms are always easier when growth is booming. If Li could wave a magic wand and get gross domestic product back into double-digit territory without pumping more air into China’s credit bubble, he would in a Shanghai minute. He needs reasonable growth to stabilize his power base and figure out how to turn the economy upside down without crashing it.

At the same time, Li’s program is about “deceleration, deleveraging and improving growth quality,” according to economist Huang Yiping of Barclays Capital Asia Ltd. in Hong Kong, who is credited with coining the term Likonomics. Carrying it out will hasten China’s downshift. The premier is sure to face mounting calls for the government to throw new cash at the economy — from businesses and from 1.3 billion Chinese, who are becoming more vocal and defiant.

Li himself has pledged that China’s growth and employment will stay above a certain floor. That raises doubts about whether he’s ready to accept the pain necessary to see through his reforms. Economists are already buzzing about a “Li Keqiang put” not unlike former Federal Reserve Chairman Alan Greenspan’s. More stimulus would only exacerbate China’s overcapacity problem and make the eventual debt reckoning bigger and costlier.

Second, is Li ready to allow a headline-grabbing default or two? The secret to China Inc.’s success has been plentiful and mispriced credit. Reckless borrowing, largely through local government-financing vehicles, was the fuel behind China’s years of double-digit growth. Special-purpose companies set up by authorities across China used this cheap money to fund giant infrastructure projects.

Companies such as China Rongsheng Heavy Industries Group Holdings Ltd., China’s biggest shipyard outside state control, are already begging for bailouts. Entire cities such as Ordos — a white-elephant project in Inner Mongolia — need help, too. According to the National Audit Office, the brand of financing vehicles that got Ordos in trouble amassed totaling $1.7 trillion at the end of 2010 (you can bet it’s much, much higher now).

Cutthroat Politics

Only after a big default or two will markets begin to price Chinese risk appropriately, allowing Beijing to liberalize interest rates. Is Li willing to accept the consequences — turmoil in markets, mass unemployment and credit downgrades?

That’s nothing compared to the third test: inviting the Communist Party’s wrath. There’s ample reason to doubt Li’s doctorate in economics will help him navigate Beijing’s cutthroat politics. If you think Abe faces resistance from vested interests, imagine what awaits Li as he tries to get Communist Party power brokers, ambitious regional leaders, a vast network of state-owned companies and the Chinese people to make sacrifices.

Li must take on thousands of party stalwarts who make millions, or billions, of dollars from dodgy land grabs, insider trading and old-fashioned rent-seeking. Politics will stymie Li’s every effort to reduce the state’s role in the economy and create the vibrant private sector China needs in order to thrive. We’ll have a sense of whether he’s serious when the number of unnamed-source gripes in the official media starts to spike.

We are years from knowing if Li can live up to the example set by Deng Xiaoping, who truly did revolutionize China’s economic system. If Li can, Likonomics will deserve to go down in history as a model for developing nations everywhere. Until then, let’s give the phrase a rest.

(William Pesek is a Bloomberg View columnist.)

To contact the writer of this article: William Pesek in Tokyo at wpesek@bloomberg.net.