STOCK MARKET WATCH -- Friday, 5 July 2013

[Demeter]

25. Likonomics: what's not to like; Stimulus v reform in China

http://www.economist.com/blogs/freeexchange/2013/07/stimulus-v-reform-china

JAPAN is still enjoying the effects of Abenomics, a campaign to reflate the economy named after Shinzo Abe, the prime minister. (The campaign stopped consumer prices, excluding fresh food, falling in the year to May.) China, on the other hand, is now enduring the effects of something called "Likonomics".

Pronounced lee-conomics, the term has nothing to do with Facebook's economy of endorsements. It refers instead to the emerging doctrine of Li Keqiang, China's prime minister, who has overseen the country's economy since March. The term was coined on June 27th by three economists at Barclays Capital: Yiping Huang, Jian Chang and Joey Chew.

Like the three "arrows" of Abenomics, Mr Li's strategy comprises three parts, they argue. Unlike the arrows of Abenomics, however, all of them hurt.

Likonomics stands for:

1. No stimulus. Whereas Abenomics embraces both monetary and fiscal stimulus, Likonomics champions neither. In a bracing speech to officials on May 13th, Mr Li argued that China had little scope for stimulus or government-directed investment. In China, like the United States, stimulus is now a dirty word. But it fell into disrepute for opposite reasons. In America, stimulus failed to win favour because it was too small. In China the post-crisis stimulus was discredited because it was too big.

2. Deleveraging. In China, credit, broadly defined, has been growing much faster than GDP. The stock of "total-social financing", an eclectic measure of loans, corporate bonds and a bit of equity financing, is now about 190% of GDP. Mr Li is committed to lowering this ratio, according to the Barclays economists, who cite last month's alarming cash crunch in the interbank market as evidence.

3. Structural reform. Mr Li talks a lot about the need for structural reform. "Reform is 'the biggest dividend' for China," he has said. At a May meeting of the State Council, China's cabinet, he outlined many worthwhile initiatives, from liberalising interest rates to raising utility prices. The hope is that he will flesh out these proposals at a big communist-party meeting in the autumn (the third plenum of the central committee of the Chinese Communist Party).

There is a lot to like about Likonomics, especially its third arrow. But I have some qualms about it. In particular, I worry that it reflects the growing influence of China's "pain caucus"...