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Of all the new economic terms born in 2013， Likonomics might be the most popular with China. The term was coined by three economists working at Barclay’s Capital， naming it after China’s Prime Minister， Li Keqiang， who began overseeing the economy in March last year. Despite all the excitement created at having a Chinese name be turned into an economic term， the Chinese people actually do not understand what the term refers to and what it means for the future of China and its economy
Likonomics involves a “three arrow strategy”， similar to Abenomics used in Japan. It features “no stimulus， deleveraging， and structural reform”. It is seen as a very important part of China’s economic reform program， focusing on slowing down GDP growth for a while in favor of a better and longer future economic boom.
Just like any particular economic situation throughout history， certain circumstances call for certain strategies.“Keynesianism，” named after economist， John Maynard Keynes， was coined during the Great Depression of the 1930s， after he proposed that depressions in the business cycle were directly influenced by aggregate demand. Similarly， “Reagonomics”， （although still a controversial issue） was named after American President Ronald Reagan’s strategies of dealing with stagflation in the 1970s and 80s. Thatcherism born in the same period as Reagonomics， also helped boost the development of the British financial industry.
The financial crisis that swept the world in late 2007 also led to the devel- opment of new economic theories and policies. And so， Likonomics was born. China has welcomed this change with open arms as its 30-year economic development strategies， which have caused some imbalance in the country， is in need of some serious economic change.
It is never easy for any economic policy to take care of the issues of micro-economy， macro-economy and the economy’s structure simultane-ously. Likonomics is no different， but it is a trend that will lead to a necessary change hopefully enabling the Chinese economy to reach a new level in the future. It will make up the “top-level design” of the Chinese economy in the coming years， along with urbanization， and the introduction of free trade zones.
But， what was “Likonomics” like in 2013 and what is hoping to achieve in 2014？
Li keqiangindex
Li keqiangindex was an index the British magazine The Economist put forward in 2010 to assess the GDP growth of China. It compared the increase in electric power consumption by industries， the increase in the volume of freight train transport， and the newly added amount of middle- and longterm loans. The traditional method of calculating GDP growth did not include these three indices into its calculation. Therefore， it could not draw the interest of local government officials， whose performance and chances of promotion heavily rely on GDP increases， and they will not fake the statistical data about them， of course. By including these into the new data， it is more realistic and can better reflect China’s economic development.
Despite being created before Likonomics， Li keqiangindex has become a very important part of its development. Although this focuses on China’s substantial GDP growth， for Likonomics， this means a low rate of unemployment.
“If we want to realize the goal of adding 10 million jobs and keep the unemployment rate in cities below 4% in 2014， we need at least 7.2% economic growth，” said Li Keqiang. “The stimulus driven by increased printing of banknotes and selling land cannot have long-term positive effect for economic growth. Instead， it will result in an economic slowdown， the upsurge in unemployment rate and inflation.”
Lu Zhengwei， chief economist of Industrial Bank of China， said： “Likonomics focuses on the central role of the market in resource allocation and distribution. Its cardinal task is to alter the government’s role in China’s economic development， streamline the administration and delegate power to local governments， the first step of the economic reform.”
The data shows that the new government， led by President Xi Jinping and Prime Minister Li Keqiang， has already given administrative examination and approval rights to local governments， covering 334 items in total. In 2013， the number of registered enterprises in China increased by 25% compared with the previous year， while the number of registered private enterprises increased by 37%， driving public invest- ment up 23%.
Lu Zhengwei’s has made it clear that if the enthusiasm for public investment can be kept， the economic growth rate can be guaranteed and the current issues of unemployment and industrial changes can be solved. “The economic policies of 2013 are to be implemented in 2014. The goal of keeping the economic growth rate at around 7.5% remains unchanged，” he said.
Xia Minren， strategic analyst at CITIC Construction Securities has said that Likonomics promises the Chinese government’s increased tolerance toward the slowdown of the economic growth. But this does not mean that economic growth will drop straight away. “China’s GDP growth rate is expected to be around 7% in 2014， but the measures the Chinese government will take will follow the goal of growing GDP by 7.2%-7.5%，” pointed out Xia Minren. So， as long as the economic slowdown cannot affect the employment and social stability， the macroeconomic policies will have the same effect the previous year. Monetary Policies
On June 19， 2013， the State Council of China put forward instructions for optimizing the allocation of financial resources by using “new capital well and revitalizing existing assets”. The People’s Bank of China （China’s central bank） and the China Banking Regulatory Commission （CBRC） then issued guidelines to all of China’s commercial banks， asking that they be followed as closely as possible. The instructions to use “new capital well and revitalize existing assets” has become a hot topic among Chinese economists and financial experts， who consider it an extension of Likonomics.
Li Keqiang， a PhD in economics，has very heartfelt opinions about the money supply. He showed deep concerns about the M2 in China， which recently surpassed 100 trillion yuan. “The M2 is twice that of GDP. That means we have plenty of currency in our reserve pool， so any increase in the money supply can easily result in inflation.”
“Some consider the monetary policy to be a measure of de-leveraging. I think it more accurate to use the term ‘no new leveraging’，” said Lu Zhengwei. Li Keqiang has also made it clear in several occasions last year that monetary policy was “neither to be eased nor tightened”.“If we do not move， we might fall， like riding a bicycle，” he said last year， comparing the steady pace of the economy to the drastic measures proposed by the central bank to change monetary policy.
In reality， the phrase “using the new capital well and revitalizing the existing assets” was created in response to the havoc caused by the said liquidity squeeze. “On one hand， we require the commercial banks to enhance their management of the fluidity to keep the moderate money supply. On the other hand， we cannot ease monetary policy； instead， we have reasonable guidance for the social expectations and private enterprises’ activities to keep stable development，” said Li Keqiang. “If we ease the monetary policy and increase the deficit， we will run into inflation， which is not what the Chinese economy wants.”
Xia Minren with CITIC Construction Securities said that the economic growth rate of China will drop further in 2014. In order to curb the impact of the economic slowdown anticipated for the first half of 2014， monetary policy is very likely to be eased throughout the rest of the year. For instance， the reserve’s deposit ratio may be lowered， while the changes that aim to establish market-oriented interest rates may also be initiated in June or July. Likonomics can be explained with one sentence – trust the market. If this is taken at face value， both the change towards market-oriented interest and exchange rate reforms should be started as soon as possible.
The Structural Changes
In 2013， two phrases were frequently mentioned when it came to the Chinese economy： “keeping the economic growth stable” and “structural changes”. In different interpretations of Likonomics there were a lot fewer descriptions of “structural changes” than“stabilizing the growth”. “This year is when the in-depth and comprehensive reform is scheduled to start. These reforms require structural changes， which are not exclusive to the economy，” said Li Xunlei， chief economist of Haitong Securities.
The structural changes are a type of ‘systematic’ project. This includes changes to the industry’s structure， governmental debt structure， and changes to the interest pattern. “The problems to be encountered during the period of structural change are actually problems for the reform，” Xia Minren said. “There is no way back or precedented case for the economic reform of China. Courage and wisdom are needed. The top-level design of policies featuring strategies like Likonomics was finished last year. This year， the focus is on how these policies are to be implemented.”
In 2014， barriers such as the benefit system’s unrefined structure will need to be overcome for Likonomics to be effective. The reform will be led by the newly founded team for ‘Comprehensive In-Depth Reform’.“Only the reform’s progress in noneconomic fields and the enhancement in the anti-corruption campaign can create good and necessary conditions for the necessary structural changes in the economic field，” Xia Minren said.
Li Xunlei has forecast that the economic reforms of 2014 might promote the birth of deposit insurance systems in the financial industry and the spread of “negative lists”， which have been experimentally carried out in the Shanghai Free Trade Zone. In addition， the change to a progressive tax system and the possible start of real estate tax and inheritance tax are worthy of attention as well.
When speaking of the change to the benefits structure， Li Keqiang said that the reform needed to be promoted with a fearless attitude. “Some vested interest groups might be offended by the reform. But the interest of the masses is the most important. So we must carry it forward，” said Li Keqiang at the start of this year .
Likonomics involves a “three arrow strategy”， similar to Abenomics used in Japan. It features “no stimulus， deleveraging， and structural reform”. It is seen as a very important part of China’s economic reform program， focusing on slowing down GDP growth for a while in favor of a better and longer future economic boom.
Just like any particular economic situation throughout history， certain circumstances call for certain strategies.“Keynesianism，” named after economist， John Maynard Keynes， was coined during the Great Depression of the 1930s， after he proposed that depressions in the business cycle were directly influenced by aggregate demand. Similarly， “Reagonomics”， （although still a controversial issue） was named after American President Ronald Reagan’s strategies of dealing with stagflation in the 1970s and 80s. Thatcherism born in the same period as Reagonomics， also helped boost the development of the British financial industry.
The financial crisis that swept the world in late 2007 also led to the devel- opment of new economic theories and policies. And so， Likonomics was born. China has welcomed this change with open arms as its 30-year economic development strategies， which have caused some imbalance in the country， is in need of some serious economic change.
It is never easy for any economic policy to take care of the issues of micro-economy， macro-economy and the economy’s structure simultane-ously. Likonomics is no different， but it is a trend that will lead to a necessary change hopefully enabling the Chinese economy to reach a new level in the future. It will make up the “top-level design” of the Chinese economy in the coming years， along with urbanization， and the introduction of free trade zones.
But， what was “Likonomics” like in 2013 and what is hoping to achieve in 2014？
Li keqiangindex
Li keqiangindex was an index the British magazine The Economist put forward in 2010 to assess the GDP growth of China. It compared the increase in electric power consumption by industries， the increase in the volume of freight train transport， and the newly added amount of middle- and longterm loans. The traditional method of calculating GDP growth did not include these three indices into its calculation. Therefore， it could not draw the interest of local government officials， whose performance and chances of promotion heavily rely on GDP increases， and they will not fake the statistical data about them， of course. By including these into the new data， it is more realistic and can better reflect China’s economic development.
Despite being created before Likonomics， Li keqiangindex has become a very important part of its development. Although this focuses on China’s substantial GDP growth， for Likonomics， this means a low rate of unemployment.
“If we want to realize the goal of adding 10 million jobs and keep the unemployment rate in cities below 4% in 2014， we need at least 7.2% economic growth，” said Li Keqiang. “The stimulus driven by increased printing of banknotes and selling land cannot have long-term positive effect for economic growth. Instead， it will result in an economic slowdown， the upsurge in unemployment rate and inflation.”
Lu Zhengwei， chief economist of Industrial Bank of China， said： “Likonomics focuses on the central role of the market in resource allocation and distribution. Its cardinal task is to alter the government’s role in China’s economic development， streamline the administration and delegate power to local governments， the first step of the economic reform.”
The data shows that the new government， led by President Xi Jinping and Prime Minister Li Keqiang， has already given administrative examination and approval rights to local governments， covering 334 items in total. In 2013， the number of registered enterprises in China increased by 25% compared with the previous year， while the number of registered private enterprises increased by 37%， driving public invest- ment up 23%.
Lu Zhengwei’s has made it clear that if the enthusiasm for public investment can be kept， the economic growth rate can be guaranteed and the current issues of unemployment and industrial changes can be solved. “The economic policies of 2013 are to be implemented in 2014. The goal of keeping the economic growth rate at around 7.5% remains unchanged，” he said.
Xia Minren， strategic analyst at CITIC Construction Securities has said that Likonomics promises the Chinese government’s increased tolerance toward the slowdown of the economic growth. But this does not mean that economic growth will drop straight away. “China’s GDP growth rate is expected to be around 7% in 2014， but the measures the Chinese government will take will follow the goal of growing GDP by 7.2%-7.5%，” pointed out Xia Minren. So， as long as the economic slowdown cannot affect the employment and social stability， the macroeconomic policies will have the same effect the previous year. Monetary Policies
On June 19， 2013， the State Council of China put forward instructions for optimizing the allocation of financial resources by using “new capital well and revitalizing existing assets”. The People’s Bank of China （China’s central bank） and the China Banking Regulatory Commission （CBRC） then issued guidelines to all of China’s commercial banks， asking that they be followed as closely as possible. The instructions to use “new capital well and revitalize existing assets” has become a hot topic among Chinese economists and financial experts， who consider it an extension of Likonomics.
Li Keqiang， a PhD in economics，has very heartfelt opinions about the money supply. He showed deep concerns about the M2 in China， which recently surpassed 100 trillion yuan. “The M2 is twice that of GDP. That means we have plenty of currency in our reserve pool， so any increase in the money supply can easily result in inflation.”
“Some consider the monetary policy to be a measure of de-leveraging. I think it more accurate to use the term ‘no new leveraging’，” said Lu Zhengwei. Li Keqiang has also made it clear in several occasions last year that monetary policy was “neither to be eased nor tightened”.“If we do not move， we might fall， like riding a bicycle，” he said last year， comparing the steady pace of the economy to the drastic measures proposed by the central bank to change monetary policy.
In reality， the phrase “using the new capital well and revitalizing the existing assets” was created in response to the havoc caused by the said liquidity squeeze. “On one hand， we require the commercial banks to enhance their management of the fluidity to keep the moderate money supply. On the other hand， we cannot ease monetary policy； instead， we have reasonable guidance for the social expectations and private enterprises’ activities to keep stable development，” said Li Keqiang. “If we ease the monetary policy and increase the deficit， we will run into inflation， which is not what the Chinese economy wants.”
Xia Minren with CITIC Construction Securities said that the economic growth rate of China will drop further in 2014. In order to curb the impact of the economic slowdown anticipated for the first half of 2014， monetary policy is very likely to be eased throughout the rest of the year. For instance， the reserve’s deposit ratio may be lowered， while the changes that aim to establish market-oriented interest rates may also be initiated in June or July. Likonomics can be explained with one sentence – trust the market. If this is taken at face value， both the change towards market-oriented interest and exchange rate reforms should be started as soon as possible.
The Structural Changes
In 2013， two phrases were frequently mentioned when it came to the Chinese economy： “keeping the economic growth stable” and “structural changes”. In different interpretations of Likonomics there were a lot fewer descriptions of “structural changes” than“stabilizing the growth”. “This year is when the in-depth and comprehensive reform is scheduled to start. These reforms require structural changes， which are not exclusive to the economy，” said Li Xunlei， chief economist of Haitong Securities.
The structural changes are a type of ‘systematic’ project. This includes changes to the industry’s structure， governmental debt structure， and changes to the interest pattern. “The problems to be encountered during the period of structural change are actually problems for the reform，” Xia Minren said. “There is no way back or precedented case for the economic reform of China. Courage and wisdom are needed. The top-level design of policies featuring strategies like Likonomics was finished last year. This year， the focus is on how these policies are to be implemented.”
In 2014， barriers such as the benefit system’s unrefined structure will need to be overcome for Likonomics to be effective. The reform will be led by the newly founded team for ‘Comprehensive In-Depth Reform’.“Only the reform’s progress in noneconomic fields and the enhancement in the anti-corruption campaign can create good and necessary conditions for the necessary structural changes in the economic field，” Xia Minren said.
Li Xunlei has forecast that the economic reforms of 2014 might promote the birth of deposit insurance systems in the financial industry and the spread of “negative lists”， which have been experimentally carried out in the Shanghai Free Trade Zone. In addition， the change to a progressive tax system and the possible start of real estate tax and inheritance tax are worthy of attention as well.
When speaking of the change to the benefits structure， Li Keqiang said that the reform needed to be promoted with a fearless attitude. “Some vested interest groups might be offended by the reform. But the interest of the masses is the most important. So we must carry it forward，” said Li Keqiang at the start of this year .