Cool, autumn weather may be sweeping across the northern hemisphere but China is basking in the warmth of Li Keqiang season. Figures for GDP and inflation in the third quarter of the year show the country in what Chinese media have dubbed the “Li Keqiang interval”, a space where, by the end of 2013, inflation has kept below 3.5% and economic growth chins above 7.5%.
Premier Li is right on the mark. Inflation hit 3.1% in September. GDP landed at 7.8% in the third quarter of the year. Li, China’s No. 2 and the head of the State Council, is earning a reputation not that of a crude command economy technocrat, but something more akin to a Swiss watchmaker.
The data give China’s leadership what Standard Chartered called “some breath back” after a slower-than-desired first half. However, showy economic numbers aren’t the final product for Likonomics, or Li’s own brand of economic maneuvering. It’s a means for buying time, a stick with which the premier will beat back critics all the while building consensus for a far-reaching economic reform package. At least those are the hopes.
With 2013 headline data wrapped nicely in a package for Li, the question now is: Can he keep up the growth?
Many economists have said no, growth is already slowing. London-based Capital Economics even noted that “This could be as good as it gets”. Industrial production, which drove the economy last quarter, was on the decline by September. Fixed-asset investment hit a nine-month low in that month.
The “bright spot” in economic growth the country enjoyed starting in August is indeed fading, Ting Lu, China economist at Bank of America Merrill Lynch, said in a note. In July, Premier Li oversaw a fine-tuned stimulus boost to certain sectors in the economy such as rails and renewable energy. Economic indicators responded accordingly, delivering confidence in the government’s ability to keep the engine running without pushing inflation skyward. All of that, Ting said, “is close to being over”.
The waning effect of the mini-stimulus package was designed to do exactly that: Run out of steam. It pushed China over a hump of slowing growth, carrying with it the legitimacy of the new leadership lineup, including Li. It’s just in time for an important political summit in November and some analysts argue the good news might not stop there.
HSBC expects no slip in economic activity through the end of the year. In a note, economists at the bank said Beijing’s 2013 budget will allow for increased fiscal spending toward in the final months of the year to support the economy. Standard Chartered’s outlook was rosy as well, projecting the uptick in data to continue in the last quarter.
Perhaps more important than buoying fourth-quarter growth is reaching the November political event known as the Third Plenum. The session, held once every five years, has traditionally been a venue for discussing serious reform. That Li and President Xi Jinping arrive without blots on their short economic records is essential for garnering support for real reform.
Across the board, analysts agreed that the strong economic data and an air of stability have helped the new leaders coast into the plenum. The significance of the meet, however, is more hotly debated. Some equities researchers have told clients to be prepared for a dud of plenary session, where the rubber stamps hit the paper but little noticeable effect follows.
If that’s the case, Li’s brand of economic direction, despite the short burst he delivered in the third quarter, will prove all but useless. The true dividend to be reaped in China, as the premier has already noted, will come from reform, not a prolonged investment-based model of development that accounted for more than 55% of GDP in the first nine months.
HSBC is still betting on a comprehensive reform plan to emerge from the meeting next month, and likely a method of maintaining a high growth rate. “These fiscal, financial, pricing and urbanization reforms should unleash China’s private investment and consumption demand, helping to sustain 7-8% growth in the medium and long run,” the bank’s report said.
By the end of November, judging by the seriousness and detail of reform blueprints, it should be clear if Likonomics is a true science or something more similar to alchemy.