In China, a new era of ‘likenomic’ begins with new Keynesian reforms

By Andrew Sheng

In the run up to the Third Plenum of the Chinese Communist Party on Nov 9-11, 2013, Premier Li Keqiang gave an overview of his reform priorities at a lecture to the 16th Chinese Workers’ Association on Oct 21 in Beijing. It was a lesson in Likenomics 101.

The lecture showed the Premier’s grasp of the technical complexities of the political economy of reform and the daunting tasks of pushing through reforms at a time of profound transformation domestically and internationally.

First, he put jobs at the core of his thinking, recognising that every one percentage point GDP growth can create 1.3 to 1.5 million jobs. To generate enough jobs for 10 million new labor entrants and keep urban unemployment around 4 percent, China needs growth of around 7.2 percent per annum. This year alone, there are 7 million graduates coming into the job market. In the first three quarters of this year, 10 million jobs were created, keeping the unemployment level on target. Second, he laid out his choices to keep growth — either use monetary and fiscal policies, or go for structural reforms. He was pretty pragmatic. With M2 money supply already at twice GDP and keeping the fiscal deficit below 3 percent of GDP, his choice is to stick to current monetary policy of appropriate tightness and fiscal deficit of around 2.1 percent of GDP.

This meant that he is opting for the third arrow of structural reforms. In classic Chinese directness, he went straight for the core issue of the relationship between state and market, but illustrated this with an example of how a Beijing student returning to his county had to get dozens of approvals and wait months before he could open a bookshop. In the last half year, his government has reduced 221 administrative approval procedures and in the Shanghai Free Trade Zone area, has introduced for the first time a negative list. Historically, Chinese officialdom has required approval for everything. In Li’s words, the government should let go what the market can do, and regulate what should be regulated.

To get the market going, especially SMEs, tax exemption has been given on VAT and income tax on SMEs earning below 20,000 yuan (US$3,300) per year.

To demonstrate that the government is serious about moving towards the market, the decision has been taken to corporatise the huge Railways Department, which employ over 2 million workers and run only 100,000km of rail, compared with 250,000km of rail in the U.S. Deregulation is a necessary but not sufficient condition for growth. The Premier laid out where he saw breakthrough areas. China will soon grant 4G mobile licenses. Last year, Chinese online e-tailing reached US$200 billion, a level already reached in the first three quarters of this year. It may overtake the U.S. e-tailing in size by next year. He has identified retirement and healthcare as key drivers of the service economy, noting that the Chinese service sector is at least 10 percent of GDP smaller than other comparable economies.

In order to address housing needs of the poor, China will renovate the low-income housing, which currently houses 40 million people, of which 70 percent are retirees. Under the 12th Five Year plan, the country will build 36 million public housing units.