There have been hopeful signs of economic recovery in China. From February to March 2020, China’s manufacturing Purchasing Managers’ Index (PMI) jumped from 35.7 to 52.0 and the services PMI rose from 29.6 to 52.3 — beating market expectations. Daily coal consumption has now reached about 90 per cent of the level seen in the past three years. The traffic congestion index for 100 cities is now over 90 per cent of that during the same period in 2019.
With 50 million migrant workers still stuck in their homes and consumers still worried about the pandemic, both supply and demand will experience a slow recovery. Demand for China’s exports has also fallen as countries outside of China grapple to contain COVID-19. Half a million Chinese companies closed in the first quarter of 2020 while only 3 million companies were established — 29 per cent lower than the same time last year.
Small and medium-sized enterprises (SMEs) are the backbone of job creation in China. Over 5 million workers lost their jobs and the urban unemployment rate rose to 6.2 per cent in February, the highest since 2002. Nearly 9 million students will also be graduating from universities and entering the job market. Employment is the top priority for the Chinese government and should be the focus of its policy response. To effectively reopen the economy and create jobs, four important steps must be taken.
First, it is crucial to avoid a resurgence of COVID-19. There are still sporadic cases emerging in China as well as cases brought by those returning to China from outside. Strict testing, tracking and quarantining measures are still of the utmost importance. Rigorous monitoring of returning migrant workers’ health and the enforcement of social distancing at workplaces are necessary measures to ensure the orderly resumption of production. From government mandates to community-based surveillance to individual discipline, every effort must be made to ensure the careful resumption of economic activities.
Second, China needs to institute more effective policies to stimulate the economy. Policy measures to combat the economic fallout have been modest so far. On the monetary front, the People’s Bank of China (PBoC) has reduced the seven-day repo rate by 20 basis points. The PBoC also cut reserve requirements for small- and medium-sized banks from 7 to 6 per cent. These measures helped provide ample liquidity to the economy. Chinese banks issued new loans totalling 5.8 trillion yuan (US$865 billion) in the first quarter of 2020, a 14 per cent increase from the same period in 2019.
On the fiscal front, the central government would increase the 2020 budget deficit-to-GDP ratio to as high as 3.5 per cent, up from 2.8 per cent last year — which is estimated to unleash 400 billion RMB (US$56.8 billion) to China’s economy. The central government also plans to issue two to four trillion RMB (US$282 billion to US$563 billion) in special treasury bonds to shore up the capital of state-backed funds and policy banks. As of 20 March 2020, China’s local government bond issuance reached 1.4 trillion RMB (US$200 billion), accounting for 76 per cent of the allocated quotas.
Given high private (non-financial) sector debt — which stood at 205 per cent of GDP at the end of 2019 — the PBoC has been prudent in cutting key interest rates, while adopting a more targeted approach to direct credit for SMEs. Fiscal spending would be much more effective and the central government has plenty of room to flex its fiscal muscles. But the central government in the first two months of 2020 only spent 427 billion RMB (US$61 billion), a meagre increase of 4.7 per cent from the same period in 2019. Local government spending in fact edged down by 3.9 per cent year-on-year to 2.8 trillion RMB (US$400 billion).
As a monetarily sovereign government, China has unlimited spending power and should immediately and significantly increase spending on social security, unemployment benefits, payroll subsidies and health care. The Chinese government should directly provide or subsidise payrolls and open public sector job opportunities to hire any workers who are willing to work but fail to find private jobs instead of relying on private companies to stabilise employment.
Government deficit and debt should not be a constraint on China’s efforts to stabilise employment and stimulate economic growth. China’s fiscal spending and public debt are relatively low compared to the United States — spending can expand considerably without worsening private or local government debt.
Third, the pandemic calls for global cooperation. While the G20 has largely failed to undertake concrete actions to fight the pandemic and protectionism, China should step up and play an instrumental role in confronting the global health and economic crises. As China resumes production, it could help restore global supply chains and boost global demand through imports. China should also consider debt forgiveness for some of the poorer and vulnerable African countries.
Fourth, restarting the economy must go hand in hand with boosting investment in technologies. It is clear from China’s experience that big data and advanced medical devices are key to containing pandemics. When it comes to more technologically sophisticated medical devices like ventilators, the top 10 producers are all US or European companies. China must expand its research and development to drive economic growth and help safeguard against the next crisis.
Yan Liang is Professor and Department Chair of the Department of Economics, Willamette University, Oregon.
This article is part of an EAF special feature series on the novel coronavirus crisis and its impact.
While I appreciate the article’s main points, I would like to ask some questions of the author.
Firstly, in terms of the last point that is the calling for investment in technologies, given the tensions between the US and China and China’s effort to catch up with the US (or reduce the gap between the two) as reflected in the US approach to trade with China including both its imposition of tariffs on imports from China and the difficulties in the process of trade negotiations that finally reached the so called phase one deal, as well as the US imposition of restrictions on exports to China of advanced technologies and restrictions on some Chinese technology companies such as Huawei, how could and/or should China invest in technologies particularly in those that are more advanced and will likely have significant positive effects on the Chinese economy?
Secondly, some questions on the third suggested point by the author, that is, “China should step up and play an instrumental role in confronting the global health and economic crises. As China resumes production, it could help restore global supply chains and boost global demand through imports. China should also consider debt forgiveness for some of the poorer and vulnerable African countries.” Leaving the debt forgiveness point aside, how will China be able to boost global demand through imports, if major international economies or the global economy is in trouble and there is little demand for China’s exports? Given that exports are a significant component of/part of its GDP, then without demand for its exports, how China could boost its GDP that associated with import expansion?
Thirdly, the author argues the following within the third points of the musts for China: “As a monetarily sovereign government, China has unlimited spending power and should immediately and significantly increase spending on social security, unemployment benefits, payroll subsidies and health care.” I found this point hard to understand and would question whether it is sound. Many countries in the world are monetarily sovereign or have a monetarily sovereign government. Is it correct to say/argue that because of this they have unlimited spending power and can increase spending on anythings they would like or want without any future problems? If that is true, then every country can spend limitless amount for whatever purposes they like without any constraints. I doubt that fantasy world exists at all. Is it really a part of sound economics? Even with the US with its currency as almost a world currency, I would doubt this argument.
Fourthly, about the author’s first point of the musts. A: how should we define “a resurgence of COVID-19”? Should that be a zero tolerance, or could we tolerate a certain level of the existence or occurance of covid-19?
This is to continue from my earlier comments and finish them.
I remember the Australian Prime Minister was very reluctant to use the term of “elimination” of the coronavirus when answering media questions about Australia’s strategy in dealing with covid-19. Rather, he used the term similar to “containment” along with the line of “flatten the curve”, on several occasions. Then you have also the British case of nearly adopting the so called herd immunity strategy and the Sweden case of a quasi herd immunity approach with much less stringent lockdowns and/or restrictions. Of course, we have witnessed the most stringent lockdowns of Wuhan city and other cities in China, as well as some slightly less lockdowns in many parts of the world. So what does the author mean when talking about what China must do in terms of avoiding “the resurgence” of covid-19 in China? To me, one may ask whether China’s approach to dealing with covid-19 starting in January 2020, while highly effective in terms of controlling/containing/almost eliminating covid-19, is the most desirable or not when dealing with potential resurgence. in hindsight of China’s and so many other countries’ approaches and their effects on both covid-19 and their economies and people’s lives, should it not be, what would be the best approach to be adopted from now on?
By posing this question, I am not by any means questioning/blaming/criticising China’s highly effective approach. China was the first to be hit by covid-19 and has done a remarkably good job in this regard given there was almost no understanding/knowledge of how the coronavirus was transmitting because of no precedent at that time when China was nearly alone in battling covid-19, particularly considering some other countries policy approaches and their effects in comparison with China. Now we have abundance of approaches and effects and we can also expand our considerations to reflect better the preferences of each society when considering our next approaches. Although it seems we still don’t have full or complete knowledge or understanding of the covid-19 transmission, we have obtained a lot of understanding of it as well as how covid-19 affects different people. Armed with that, we are now much better positioned to consider the costs and benefits of different lockdowns/restrictions in the context of their effects on the economy and on people’s life, and their trade offs with lower numbers of covid-19 patients and deaths.