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China’s economic prospects call for stimulus

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Employees work on a production line inside a Dongfeng Honda factory after lockdown measures in Wuhan, the capital of Hubei province and China's epicentre of the novel coronavirus disease (COVID-19) outbreak, were further eased, 8 April , 2020 (Photo:Reuters/Song).

In Brief

China’s annual GDP growth has been gradually falling since 2010 from over 10 per cent to nearly 6 per cent by 2019. Last November I argued it was time for China to stem its economic slowdown with expansionary monetary and fiscal policies. But China’s economic growth has since faced the COVID-19 challenge and now stimulus is more important than ever.


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The lockdown of Wuhan on 23 February 2020 marked a totally new economic upheaval. China’s supply chains were suddenly disrupted nationwide, with urban dwellers forced to stay indoors in barricaded neighbourhoods and migrant workers unable to return to work in cities.

The enormous supply-side shock brought China’s economy to a standstill. The National Bureau of Statistics of China (NBSC) reported on 17 April that the annualised GDP growth rate in the first quarter of 2020 was negative 6.8 per cent, the worst performance China has registered since it began compiling GDP statistics. But that figure is much better than what most Chinese economists expected.

The tremendous effort, national lockdown and economic sacrifice made by people in China have brought COVID-19 under control. Wuhan’s lockdown was lifted on 8 April 2020, marking a new beginning for the Chinese economy and its social life. Most major economic indicators show that the Chinese economy is up and running again — 99 per cent of large enterprises and 70 per cent of small and medium-sized enterprises have restarted. The Purchasing Managers’ Index in March was 52.0 last month, up from 35.7 in February and beating market expectations. Physical indicators including electricity consumption and transport volume also suggest that the economy is gradually returning.

Provided that the epidemic does not resurge, how fast can the economy grow? In real terms, China’s 2019 GDP amounted to 19.7 trillion RMB (US$2.8 trillion) in the first quarter of 2019 and 69.45 trillion RMB (US$9.8 trillion) in the remaining three quarters. Official figures place China’s GDP at 18.4 trillion RMB (US$2.6 trillion) in the first quarter of 2020.

China’s GDP grew 6.1 per cent in 2019. Assuming that China maintains a real growth rate of 6 per cent in the remaining three quarters of 2020, the growth rate for the year will be about 3.2 per cent. But the pandemic’s unpredictability makes any economic forecasts problematic. And China still has to be extremely careful about the possibility of a resurgence of the virus.

Uncertainties aside, the main question is whether the Chinese government will implement expansionary macroeconomic policy in response to the COVID-19 shock. The most urgent priority is for the government to help those who have lost their jobs. According to the NBSC, the unemployment rate is 5.9 per cent, but the true situation is likely to be far worse. According to Tianyancha, an online platform providing information on enterprises, around 460,000 enterprises in China went into bankruptcy in the first quarter of 2020. These data indicate how serious the unemployment situation could be.

The government will need to redouble its efforts to get a realistic bead on the unemployment situation, then use all of its fiscal means to reduce the hardship of the unemployed. China can utilise its sizable unemployment insurance fund to help those covered by the scheme and also use its budget and other means to support those who are not directly insured.

Besides the announcement about the issuance of some special purpose bonds ahead of schedule, there have been few significant fiscal policy measures aimed at combatting the economic consequences of the epidemic at the central government level. Local governments at different levels, however, have been driven to take various measures including tax cuts and exemptions, reducing charges, and providing subsidies to alleviate pressures on enterprises and unemployed workers.

The People’s Bank of China (PBOC) has also cut bank reserve requirements twice, lowered the interest rate on medium-term lending facility loans twice and injected liquidity into financial institutions via reverse repos and relending. These operations are aimed at enabling commercial banks to provide financial support to enterprises to help them withstand the COVID-19 shock.

China’s battle against COVID-19 is now entering a new stage where the focus of macroeconomic policy should shift to dealing with the demand-side shock. China should prepare to launch a comprehensive stimulus package to boost economic growth, especially when there is ample room for the government to adopt more expansionary fiscal policy.

The country has a relatively low government debt-to-GDP ratio and relatively strong demand for its government bonds from the public, commercial banks and other financial institutions. Inflationary risks are also low for the foreseeable future, providing room for the PBOC to further lower the benchmark interest rates — a move that will complement fiscal expansion and ease the financial burden on businesses.

With a strong stimulus package and a contained virus, China’s growth prospects for 2020 are not yet lost.

Yu Yongding is a Senior Fellow at the Chinese Academy of Social Sciences (CASS) and former member of the Monetary Policy Committee of the People’s Bank of China.

This article is part of an EAF special feature series on the novel coronavirus crisis and its impact.

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