Li's Shock Treatment to China Lenders Evokes Ex-Reformer
David Fuller's view The jolt
Premier Li Keqiang delivered to China's financial system emulates a playbook
crafted by predecessor Zhu Rongji in the 1990s, inflicting short-term pain in
the anticipation of long-term gain.
Li, who took office in March, sent the clearest message yet the past week that China's new leadership team wants lenders to rein in credit expansion, depriving money markets of liquidity in the biggest squeeze in at least a decade. Next steps may include tightening that sends some smaller financial institutions into bankruptcy, according to analysts at Nomura Holdings Inc.
Zhu's strategy of cutting the size of state enterprises with millions on the payrolls helped set the stage for years of growthin excess of 10 percent. With a focus now on a slower expansion pace that avoids asset bubbles or bad-loan crises, Li and his team face a possible backlash from indebted local governments and state banks that are among the world's largest by market value.
"You've got to use a hammer to change this system," said James McGregor, a Beijing-based former chairman of the American Chamber of Commerce in China and author of the 2012 book "No Ancient Wisdom, No Followers: The Challenges of Chinese Authoritarian Capitalism."
"There's no rule of law here, so you've got to use blunt instruments to get party members out there in the financial system to pay attention," said McGregor, now chairman for Greater China at public-relations company APCO Worldwide Inc. "This got their attention."
"Both premiers are reformers and investors are trying to find out if Li, like Zhu, has the courage and will to push for wrenching changes," said Fred Hu, the Beijing-based founder of private-equity firm Primavera Capital Group and former Greater China chairman at Goldman Sachs Group Inc. "Zhu's reforms, while unpopular and painful at the time, ultimately delivered tremendous benefits to the Chinese economy."
Li's economic team includes leaders who worked under Zhu in the 1990s such as People's Bank of China Governor Zhou Xiaochuan, who was a deputy governor from 1996 to 1998, and Finance Minister Lou Jiwei, a vice minister from 1998 to 2007. Both played roles in economic restructuring that led to China joining the World Trade Organization in 2001.
Li, China's first premier with an economics doctorate, gave his "unwavering commitment" to the 400-plus-page "China 2030" report published last year by the World Bank and the Development Research Center of China's State Council, then-World Bank President Robert Zoellick said in February 2012.
The report lays out a framework to restructure China's economy through market mechanisms. It recommends loosening controls over interest rates, boosting consumption, rolling back state enterprises and speeding a shift to market-set prices for everything from loans to raw materials.
My view - I did not anticipate the new government's crackdown, which has obviously weakened China's performance since the election. Nevertheless, these measures are extremely interesting in terms of China's medium to longer term performance. Meanwhile, China's stock market is not expensive in terms of historic PER or Yield.