No. 39 | China's Economic Outlook in the Time of COVID-19
What is the impact of COVID-19 on China? Will it take a long- or short-term toll on the fundamentals of the Chinese economy? What kinds of challenges will the financial sector in China face with regard to fluctuations in banking, bonds, stocks, real estate, and foreign exchange markets? The central government has made clear its determination to step up efforts in improving the socialist market economy and “making maximum reductions to its direct allocation of market resources and direct interference with macroeconomic activities.” How should we understand these initiatives? To answer these questions, the Academic Center for Chinese Economic Practice and Thinking (ACCEPT) of Tsinghua University, along with Xuexi Qiangguo and Tencent Finance, held the 38th Tsinghua University Forum on China and the World Economy to facilitate an online dialogue concerning “China’s Economic Outlook in the Time of COVID-19” on the evening of May 19, 2020.
Li Daokui, Director of ACCEPT at Tsinghua University, and Li Ke’aobo, Deputy Director, presided over the forum. Additional attendees included Dong Zhiyong, Dean of the School of Economics at Peking University; Fu Chengyu, former Chairman of Sinopec; Peng Wensheng, Everbright Securities Chief Economist; Qiu Baoxing, Counselor of the State Council; Yao Jingyuan, researcher at the Counselors' Office of the State Council; and Yuan Gangming, research fellow at ACCEPT of Tsinghua University.
At the forum, Li Daokui released a report entitled “Security, Wellbeing, and Long-term Development: Strategic Report on the Analysis of the Economic Situation in a Time of Global Outbreak” (hereinafter referred to as the Report) together with Li Ke’aobo and research fellows from ACCEPT Li Bing and Guo Meixin. The Report identifies the COVID-19 pandemic as the biggest challenge for the world economy since World War II and predicts that in the next two or three years, the Chinese economy will face its most significant trials since the era of reform and opening up. The pandemic is likely to usher in some considerable shifts that would have otherwise happened in the next two or three decades, accelerating once-in-a-century changes and compressing them into a relatively short amount of time. Accordingly, the Report suggests that China’s economic work and policies in the next few years should consider three directional suggestions: safeguarding security, upholding people’s wellbeing, and seeking long-term development.
In terms of security, the Report highlights the fact that the international environment has deteriorated due to anti-globalization, unilateralism, and nationalism. Furthermore, China is still undergoing the middle and late stages of industrialization as well as the middle stage of urbanization, and thus is currently in the key timeframe for industrial upgrading and the deepening of information technology development. Therefore, the Report emphasizes that we should maintain strategic thinking and take proactive actions against potential risks in areas such as food, oil, industrial chains, finance, economic operations, and industrial upgrading. Faced with the threat of hostile economic maneuvers from the US, China should take firm countermeasures. We should find a way to facilitate harmony and cooperation despite the current state of conflict and reinstate negotiations with the US to ensure security.
As for people’s wellbeing, the Report posits that the most important task is to ensure employment and income for the low- and middle-income groups. Meanwhile, we should also take measures to stabilize private enterprises and small- and medium-sized enterprises. As China deals with the impact of the virus and reinvigorates the economy, fiscal policies should take a leading role in prioritizing public wellbeing and maintaining long-term momentum for development. The Report makes the following recommendations: First, the government should issue 1.5 trillion yuan in special government bonds for COVID-19 control, distribute cash subsidies to low- and middle-income people as well as the people of Hubei, who were hit hard by the virus, and replenish the capital of the China Development Bank (CDB) and other commercial banks. Second, the government should expand the scale of CDB bonds and launch another round of projects to strengthen areas of weakness in infrastructure. Third, the government should offset reductions in social security payments with state-owned assets transfers. Fourth, the government should remove policy roadblocks and make automobile consumption the major driver for consumption in the next phase.
Long-term development necessitates active planning in areas like enlarging the middle-income population, new-type urbanization, leverage replacement, SOE reform, deepening China’s opening up, and expanding China’s circle of friends in the international economy to lay a solid foundation for the long-term development of the Chinese economy.
At the Forum, Li Daokui asserted that China’s economic growth rate this year should be based on its capabilities at the present moment, with a focus not on speed but on ensuring people’s wellbeing and security as well as creating space for future economic development. He also stated that the monetization of fiscal deficits will do China no good. Although the US is able to do this in the short-term through the hegemony of the US dollar, the RMB of China has yet to be internationalized, and thus reducing fiscal deficits by printing money is a recipe for disaster.
Based on extensive research, Li Ke’aobo stated his belief that foreign enterprises returning home will not be a concern in the short run, but may change the modes of trade that have taken shape in over forty years of reform and opening up in the long run. What matters to foreign enterprises that choose to stay in China is access to the Chinese market and future profits. The Chinese government has always been friendly to foreign capital, and there is not much to worry about as long as China continues to deepen its reform and opening up. Even if there are other viable alternatives overseas or a full-blown retreat, the process will be slow. At the same time, China is endowed with strong supporting industries and it will be difficult for foreign enterprises to find better alternate plans in other parts of the world for quite a while. On the other hand, the US itself is divided right now, and it also faces diminishing international influence. As technology is one of America’s trump cards, the likelihood is increasing that the Chinese and American science and technology industries will decouple, possibly leading to the end of the model of R&D in the US and production in China that has been utilized over the past four decades. Thus, China should strengthen its R&D capability in this sector and develop domestic demand. Different types of enterprises—including SOEs, private enterprises, and foreign enterprises—will all be welcome and treated equally in areas not involving national security.
Fu Chengyu made the point that energy security not only involves energy itself. China is not short on energy as a whole, but struggles to maintain a reasonable energy mix. Currently, China is heavy on coal and light on oil and clean energies. Apart from trade, when we evaluate energy security we should also consider international energy supply and demand, energy-related political alliances, the future relationship between the RMB and the dollar, and US debt. At the present moment, China still depends heavily on imports for oil, which will be hard to change in the short run. There is even the possibility that China could face its supply being cut off temporarily due to changes in the international situation. Therefore, we should make full use of our foreign exchange reserves and American debt to promote the transformation from currency form to physical goods and further to futures. We should form trade alliances with suppliers, promote yuan-denominated oil trade, scale-up oil reserves, increase investment in new energy infrastructure, and combine futures trading with physical trading.
Peng Wensheng asserted that the real economy has taken a major hit from the pandemic. From governments to central banks worldwide, there have been strong and timely policy responses resulting in good liquidity. Investors assume that the pandemic will be temporary, and so also is the COVID-induced slump in the earnings of listed companies brought about by the impact on the real economy a short-term phenomenon. Combined with good liquidity, we can see a relatively strong rebound in the American stock market. The performance of the Chinese stock market has been more resilient than the American one, with relatively smaller fluctuations after the large fall on the first trading day following the Spring Festival holiday. In fact, the overall performance has been quite satisfactory. The future development of the market will depend on how well we are able to keep the pandemic under control. Therefore, we should not focus on the growth rate for this year, and should instead orient ourselves toward supporting people’s basic living needs and improving their quality of life. People’s quality of life and security under the surface of slower GDP growth cannot be measured by monetized trade. Furthermore, economic recovery is very likely to take place in the second half of the year, depending on whether the growth rate is able to return to its previous path. If the global economy recovers and risk-taking preferences rise, the likelihood of the RMB undergoing pressure will be small.
Dong Zhiyong argued that despite the unprecedented and profound impact of the virus outbreak on the Chinese economy, the outbreak should not bear all of the blame for this downward pressure. While the pandemic is a temporary and sudden external incident that may have profound impacts in many respects, China will maintain its strong upward trajectory in the long run, and will not trend systematically toward deviation. Dr. Dong further argued that there should be appropriate cuts to interest rates and required reserve ratios in monetary policy. The scale and pace of interest rate cuts should be different from those of the past, as this is a gradual and structural process based on reform and marketization. Liquidity will be improved with such transmission mechanisms through interest rates, and we should increase the shares of loans to private enterprises and SMEs. Having reached consensus in monetary policy to expand government bonds, general bonds, and special local government bonds, we should decentralize excise taxes, increase the handover of profits from SOEs, and focus on people-oriented fiscal expenditures. Furthermore, we should fully consider policy costs and refrain from strong stimulus measures. The economic downturn is not necessarily a bad thing, but rather reflects the self-correction and adjustment capabilities of the market to deflate bubbles, phase out backward capacity, and stimulate innovation. After the pandemic, we will still have to rely on the invisible hand to restore normal economic order. When adopting policies of structural adjustment, the government should clearly define the powers and responsibilities of the government, enterprises, and the market while also cultivating an external environment that is conducive for enterprises to resume and develop production. The prevention and control of the pandemic cannot be an opportunity for the government to expand its authority, as the future of China depends on the development of the private economy. We must consider whether to allocate resources by the market price rather than administrative instructions, whether to offer a level playing field to SOEs and private enterprises, and provide effective protection of property rights.
Yao Jingyuan maintained that the government should not set a specific growth target for GDP this year, as the novel coronavirus has taken a heavy toll on the economy, and a high growth target requires a series of policy measures that bring risks of inflation. Professor Yao argues that GDP growth figures highly quantify economic activities, and while China pursued high GDP growth rates during the early stages of reform and opening up, GDP is only capable of representing economic aggregates, and does not delineate the structure of the division. Moreover, GDP itself cannot reflect the cost required to obtain a certain amount of GDP. Yao predicts that there will be positive GDP growth in the second quarter and that the growth rate will register over 6% in the third and fourth quarters. He holds that China’s medium- and long-term development requires improvements to the quality of economic growth as well as adjustments to the economic structure. Furthermore, he recommends that rather than relying solely on GDP, a series of livelihood indicators (such as new jobs created and the employment rate) should be used to comprehensively evaluate China’s prosperity level.
Qiu Baoxing suggested that rather than pursuing quantity, China’s urbanization process has shifted to a pursuit of quality. In terms of quantity, China’s urbanization is at a turning point, whereas quality urbanization has just kicked off. Quality urbanization refers to consumption upgrades in housing, renovation of old residential areas, and the concentration of the population in metropolitan areas and other advantageous areas. Qiu argues that in an economic crisis, in contrast with foreign trade and consumption, investment is the only factor that can be domestically operated and controlled. Thus, investment can be an extremely useful tool. However, we should be careful to direct investments toward sectors that can improve people’s lives, generate short- and long-term profits, and tackle economic weaknesses. Sprucing up aging residential areas is an important direction for investment. In fact, the government will invest 1 trillion yuan to renovate 7 million such homes this year alone. The total scale of aging residential areas that require renovation in China amounts to 10 billion square meters, and at an estimated 1000 yuan of investment per square meter, this totals to 10 trillion yuan of potential investment. There is enormous potential here, as Qiu concludes from experience that a job is created for every 140,000 yuan of investment in the construction industry. This growth can also help drive the development of other industries including automobiles and home appliances.
Finally, Yuan Gangming added that the American economy is at its worst since the Great Depression, with retail sales falling by over 16% in April. Frustrated by the high unemployment rate, American people are protesting and calling for the easing of lockdowns, which could lead to a resurgence of the pandemic. Yuan asserts that it will be a long time before a vaccine is successfully developed, and it is impossible for economic activities to normalize by June in America. He thinks that with a 10% growth rate for the Chinese currency, the interest rates will be maintained at a reasonable range, and the fiscal deficit ratio will also be within a safe range. Thus, there is quite a lot of room for adjustment in both China’s monetary and fiscal policies.
