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In June， it seemed that the Chinese capital market had suddenly spun out of control. The overnight Shanghai Interbank Offered Rate （SHIBOR） shot up from 4 percent to over 30 percent， which caused a panic in the capital market. On June 24， A-shares plummeted， and rumors of a “cash crunch”spread far and wide.
Under such circumstances， the capital market predicted the People’s Bank of China might plan to change its money supply model of “taking from me whatever you want” and force financial institutions to deleverage. Barclays Capital first coined the word “Likonomics” after Chinese Premier Li Keqiang to describe a series of new policies adopted by the government led by Li. According to Barclays， Likonomics has three key pillars： no stimulus， deleveraging and structural reform.
It is believed that Likonomics could redefine China’s monetary policies. But such a new policy mix has not yet been fully understood by the capital market and it will take some time before China’s capital market grasps the essence of Likonomics and reaches a new balance following an adjustment period.
What is Likonomics？ What are the key features？ Likonomics is an array of policies adopted by the new term of government to strategically restructure the economy and enhance the quality and efficiency of economic growth. In the financial field， these policies are designed to redistribute capital resources， serve the real economy， and at the same time maintain stability in the financial sector.
The “cash crunch” in June actually created anticipation of a reform in interest rates. When large banks and other financial institutions realize that a market-oriented reform of the interest rate is upcoming， more financial resources will be invested in efficient assets and more attention will be paid to risk management.
Likonomics makes two monetary policy objectives. First is to control the supply of money. China’s money supply has soared for years， far higher than the country’s GDP growth. Now that the economy grows steadily and consumer prices are stable， the government has decided to control the liquidity.
The second focus will be laid on interest rate liberalization. Premier Li has reiterated the necessity of interest rate reform at executive meetings of the State Council. That is to say， the market， to a large extent， will exert a significant influence on capital prices. Guided by monetary policies and market price mechanisms， capital resources will flow to more efficient industries and enterprises.
In this way， the so-called “new balance”that the capital market has to reach can also be explained. Since the era of “cheap money” has come to an end， projects that need long-term funds， like infrastructure construction， will face greater pressure to repay loans. For industries harassed by severe overcapacity， a new round of acquisitions and reorganization can be expected because Likonomics prohibits all forms of credit extension and direct financing.
In the next few years， as the capital market gradually adapts itself to the “new balance” recommended by the Likonomics， listed companies of all sectors will be reval- ued.
Under such circumstances， the capital market predicted the People’s Bank of China might plan to change its money supply model of “taking from me whatever you want” and force financial institutions to deleverage. Barclays Capital first coined the word “Likonomics” after Chinese Premier Li Keqiang to describe a series of new policies adopted by the government led by Li. According to Barclays， Likonomics has three key pillars： no stimulus， deleveraging and structural reform.
It is believed that Likonomics could redefine China’s monetary policies. But such a new policy mix has not yet been fully understood by the capital market and it will take some time before China’s capital market grasps the essence of Likonomics and reaches a new balance following an adjustment period.
What is Likonomics？ What are the key features？ Likonomics is an array of policies adopted by the new term of government to strategically restructure the economy and enhance the quality and efficiency of economic growth. In the financial field， these policies are designed to redistribute capital resources， serve the real economy， and at the same time maintain stability in the financial sector.
The “cash crunch” in June actually created anticipation of a reform in interest rates. When large banks and other financial institutions realize that a market-oriented reform of the interest rate is upcoming， more financial resources will be invested in efficient assets and more attention will be paid to risk management.
Likonomics makes two monetary policy objectives. First is to control the supply of money. China’s money supply has soared for years， far higher than the country’s GDP growth. Now that the economy grows steadily and consumer prices are stable， the government has decided to control the liquidity.
The second focus will be laid on interest rate liberalization. Premier Li has reiterated the necessity of interest rate reform at executive meetings of the State Council. That is to say， the market， to a large extent， will exert a significant influence on capital prices. Guided by monetary policies and market price mechanisms， capital resources will flow to more efficient industries and enterprises.
In this way， the so-called “new balance”that the capital market has to reach can also be explained. Since the era of “cheap money” has come to an end， projects that need long-term funds， like infrastructure construction， will face greater pressure to repay loans. For industries harassed by severe overcapacity， a new round of acquisitions and reorganization can be expected because Likonomics prohibits all forms of credit extension and direct financing.
In the next few years， as the capital market gradually adapts itself to the “new balance” recommended by the Likonomics， listed companies of all sectors will be reval- ued.