Premier is keen to take advantage of free-trade and investment talks to push internal reforms

Likonomics has become a buzzword just a few weeks after its birth.

The word, coined by Barclays Capital to describe the governing philosophy of the cabinet led by Premier Li Keqiang, has three major parts: no stimulus, de-leveraging and structural reform. The essence of the philosophy is to achieve sustainable growth and improve the quality of the economy at the price of possible short-term pain such as economic slowdown and business closures.

Those are all internal measures, but if you think that is the only domain Likonomics is going to deal with, you may be wrong.

There have been signs recently that China's new premier wants to add a global touch to his blueprint for the country's economy. That is, to promote integration into the world economy. Free-trade agreements and bilateral investment treaties are the two vehicles he will use to reach that goal.

China has quickened the pace of free-trade talks with major trade partners since Li took office in March. In April, China signed an agreement with Iceland, the first with a European country. The following month a memorandum of understanding was signed with Switzerland, and a formal FTA was signed earlier this month.

What's more, the speed of free-trade negotiations with South Korea has increased. The interval between the fifth round, on April 26, and the sixth round, on July 2, was a bit more than two months; the interval between earlier rounds was about three months.

In another move that reflects the big change in mindset of the new leadership, the Ministry of Commerce said China may join the Trans-Pacific Partnership. The free-trade pact, led by the United States, and which now involves another 10 countries, was initially regarded as a US effort to return to Asia and contain China on the economic front. The previous cabinet led by premier Wen Jiabao kept its distance from the Trans-Pacific Partnership.

But Li seems to be thinking differently: China should not be excluded from any major regional free-trade deals.

His memory of China's success in the initial years of this century must be fresh, and his belief in free trade and globalization may be firmer than that of his predecessor.

Indeed, China's economy experienced a golden five years and the country became the world's second-largest economy after joining the World Trade Organization (WTO) in late 2001, a symbol of the country's integration into the world's trade system.

The international layer of Likonomics does not stop with foreign trade. China has also become active in striking bilateral investment treaties.

Although Chinese and US negotiators did not start specific talks on a bilateral investment treaty during their ninth round of negotiations in Qingdao, Shandong province, early last month, it is clear that China is striving to get a "high-quality" treaty with the US.

China has signed more than 100 bilateral investment treaties with other economies, the earliest ones dating back to the 1980s. But most deal mainly with protecting assets and fail to touch core issues such as national treatment of foreign businesses and market access.

Li seems determined to make real things happen, and his push for China's further integration into the world financial system has at least two reasons.

First and foremost, pushing China toward globalization will help it press ahead with structural reform and opening-up.

There is an assumption that China's opening-up and reforms have stalled since it entered the WTO. Whatever the case, it is a fact that the country has been less enthusiastic in promoting reform and opening-up since then.

Top leaders' cautiousness over the global financial crisis was one reason for the slowed process. But more importantly, it was because, as many officials and economists have said, reforms that remained to be done were fraught with difficulty.

The formation of vested interest groups and hesitation about fueling economic growth with easy credit and assets inflation became the two major hurdles to reform and opening the market wider.

To kick forward structural reforms, Likonomics borrows an idea from Zhu Rongji, the premier from 1998 to 2003. That is, to use external force to propel internal reforms.

Just as Zhu did with the entry into the WTO, Li wants to use free-trade agreements and bilateral investment treaties to take China's reform and opening-up to a new level.

Indeed, that strategy will work if Li sticks to this path.

The bilateral investment treaty with the US is a prime example. The US is the most critical negotiator China will face, especially after the US published its model of a treaty, which strengthens environmental and labor protection and restrictions on state sectors. What the US demands is exactly what China is weak at and where reforms are jammed. Bilateral-investment treaty talks will definitely push China to further open up and reform its systems.

It is undeniable that China has largely played by international trade rules since it joined the WTO, but its investment system still differs greatly from the international one. For example, its basic concept of foreign investment is to manage it instead of serving it, as can be seen in its foreign investment laws passed in the early 1980s that remain fundamentally unchanged.

China issues, and essentially updates every fives years, a catalogue that specifies areas in which the country encourages, limits and bans foreign investment. The catalogue takes the form of a positive list, while the international norm is to use a negative list that allows foreign investors to enter any areas not proscribed.

China grants national status to foreign investment only after it invests and passes the approval of various government departments, but the common practice in developed countries is to treat all foreign investors equally even before they start investing.

If China wants to have free-trade agreements and bilateral investment treaties with the world's major economies, it will have no choice but to become more open and reform its economic systems.

The other reason why Li is so keen on China joining the world's economic systems is that he wants the country to be a global rule-setter instead of a follower.

The process of joining the WTO proved to be painful and tedious for China. It compromised on the issue of economy-market status and accepted a quota on textile exports. All these were simply the price a latecomer had to pay to join a club already dominated by early birds.

China is now the world's second-largest economy, biggest trader and largest manufacturer. And it already plays a crucial, if not dominant, role in some regional trade and investment systems, as reflected in the China-ASEAN free-trade agreement and the negotiations for a China-Japan-South Korea agreement. Its position in the global economic system is now better than ever, and that will give the country more bargaining power.

In addition, the world is reshaping a new trade investment landscape with the proliferation of regional free-trade agreements and bilateral investment treaties. The US and the EU are discussing both. The US is also playing a leading role in grouping major trade partners around the Pacific and the Atlantic oceans through two free-trade agreements, the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership. These deals forged among major economies will undoubtedly become the model for international rules.

Li, of course, does not want to lose out in this round of reshaping. China must have its voice in the new system in the making. If not, it will have to repeat its painful experience of paying the admission fee to be part of a new system.

The authors are financial analysts in Shanghai.

(China Daily European Weekly 07/12/2013 page12)