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Weakonomics

11 September 2014 By John Foley

A year ago, then-new Chinese Premier Li Keqiang looked like a champion of market forces. Now he seems a bit like a passenger. Capitalistic reforms, and foreign investors, have moved down the pecking order.

Li’s address to the Asia-facing financial elite at China’s annual World Economic Forum on Sept. 10 set the tone. At the same meeting in 2013, he rattled off a laundry list of promised financial reforms, from loosening capital controls to insuring bank deposits. This year brought mostly empty rhetoric. The word “innovation” made 34 appearances.

The fear is that market reforms have been sidelined. Just look at China’s record August trade surplus or its pile of foreign currency reserves, which has topped $4 trillion and is still rising. Both are visible signs of a managed exchange rate policy and closed capital account. The yuan has weakened by 6 percent in real, trade-weighted terms since its peak in January. Other signs of progress, like willingness to let financial products fail, and relinquishing control of non-strategic state companies, are also missing.

As market reform goes, so goes Li. A “leading group” set up to mull reforms on behalf of the Party is headed by President Xi Jinping. That’s a departure from prior leadership double acts, which have mostly tended to leave economic issues for the premier to manage, at least for appearances. The Shanghai Free Trade Zone that Li championed a year ago has achieved little.

Meanwhile, small reforms have stayed small. Li proudly announced that he has overseen the reduction or delegation to lower levels of 600 administrative processes since March 2013. But that’s scant consolation for foreign banks which still can’t open new branches, and which have just 2 percent of China’s total bank assets. The imminent opening of Shanghai-to-Hong Kong equity trading is progress, but subject to strict quotas – and may be more useful for letting money out than in.

Li may yet have his moment. Corruption crackdowns and investigations into pricing abuse, which dominate the agenda, are important too. Relaxing controls over markets too soon could just make those worse. But the hype is fading. Investors who hailed the era of “Likonomics” must be lamenting the buzzword that never was.

 

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