-Written by Seunghye Shin
Hello guys! This is Frank.
Today, I’m going to introduce a newly-coined word, Likonomics, which refers to the emerging economic policy by Li Keqiang, China’s prime minister.
While Japan’s Abenomics dominated news headlines in the first half of the year, the second half is the time for China’s Likonomics! What’s the difference between these two policies? In a nutshell, Abenomics is a campaign to reflate the Japanese economy in order to recover from the lost two decades. On the other hand, Likonomics aims at long-term structural reform enduring short-term pain and its ultimate goal is to accomplish sustainable economic growth.
Then, what made China to come up with this policy? Well, for decades, China has been ranked 2nd in terms of economic size with the nominal GDP growth of 10%. However, its growth rate has been decreasing since 2007 and finally in 2013 it recorded 7.7% which is far lower than expected. Experts pointed out that the weak base of the domestic market and the bubble caused by overinvestment are the major causes. Feeling urgent need of reform, Li keqiang decided to come up with Liknomics which basically assumes that its original growth model – government-led investment – has driven to its limit.
There are three “pillars” in Mr. Li’s strategy.
1. No Stimulus: Compared to Abenomics which is fond of both monetary and fiscal stimulus, Likonomics avoids stimulus or government-directed investment which was discredited for its excessively large scale. Instead, Mr. Li stresses the importance of efficient capital distribution through the market principle in order to maintain stable monetary policy.
2. Deleveraging: China hopes to lower the high ratio of credit to GDP which has led the nation to credit crunch. If the bubble collapses as a consequence of economic recession, there’s a possibility of another serious financial crisis. Thus, Mr. Li wants to reduce its debt in order to restrain credit crunch and invest in the real economy.
3. Structural Reform: Mr. Li stated that “reform is ‘the biggest dividend’ for China” and put emphasis on liberalizing interests and raising utility prices.
Then, what does this change in Chinese economic policies have to do with Korea? It is likely that Likonomics along with the period of the exit strategy of the U.S. will be major variables that can determine the flow of the global economy. Especially, the Korean economy, with its high dependency on China is highly vulnerable to its economy in terms of trade. However, the economic downturn of China is an expected risk factor as well. Therefore, if we recognize the risk and start seeking for the right solutions for the economy in advance, the economy might weather the recession with minimal shocks.
-Seunghye Shin (email@example.com)