Abstract: As the novel coronavirus outbreak continues to spread, the key priority is still to control the spread, especially in the affected areas. Economic policies should be carried out in three steps in a coordinated approach. First, restore flow of population and logistics and production activities to restart the economic cycle. Second, carry out pragmatic structural policies in a targeted approach. Third, demand expansion policy should follow up as soon as productions return to normal.
I. The epidemic has paralyzed production activities in China to a certain extent
At present, there are signs of improvement in the situation of the epidemic outbreak, but a number of uncertainties still exist. Stringent measures will certainly help to control the epidemic, but they could also disrupt production activities to a certain extent. Logistics in some areas is blocked, the week-long Chinese New Year holiday has been extended, non-local worker returning to cities are isolated, and enterprises lack protective materials, which have all impacted productions, order delivery, inventory adjustment, as well as employment.
With shocks from outbreak, the imbalance between supply and demand is significant, with shortage and surplus of goods co-existing which in turn has aggravated the panic of the public, and there lack sufficient supplies for the prevention and control of the epidemic. Specifically:
Tight capital flow. The issue has captured wide attention from the media, and the central and local governments have taken some measures to address it. Liquidity assistance has eased the problem for enterprises for the time being, but it can hardly prevent further deterioration of business conditions. Affected by logistics bottlenecks, shortage of labor and other restrictions caused by the epidemic, many industries in China can hardly start normal production at the moment. In some cities, the supply of electricity and coal energy is also constrained.
Logistics is impeded. First, many cities have implemented traffic control and road closure measures, which has blocked logistics in those regions. Second, logistics capacity is also affected as transport companies extend the holiday and migrant workers back to work are quarantined. Third, the mobility of logistics companies' staff is also impeded. Some of them live in remote areas and are not allowed to go out freely. With public transport system being half paralyzed, and delivery personnel having to going through body temperature test before being allowed to enter a logistics park, it will take as long as 4 hours for them to get to work. Some delivery drivers entering epidemic areas are not allowed to leave, which has reduced the manpower and negatively affected the operation of logistics companies.
Population mobility is restricted. In order to prevent and control the epidemic, many local governments require companies not to restart business until February 10. The date is much later or even undecided in epidemic areas.
As the epidemic continues to spread, many workers are unwilling to go back to work. Passenger flow on February 3rd and 4th - which are 10th and 11th of January in Chinese lunar calendar, was reduced by 87% and 89% respectively. Inter-provincial workers will go back to work 2-3 weeks later than they would do in other years, with the requirement of 2-week self-quarantine after returning to the cities where they are employed.
Enterprises lack protective materials. Following the resumption of productions, enterprises will face such problems as how to quarantine interprovincial employees back to work, (particularly for labor intensive enterprises for which it might be challenging to provide sufficient protective materials such as masks to employees), and what prevention and control standards and contingency plans to follow.
II. Dealing with supply disruption: demand expansion policy should wait for the right timing
The epidemic mainly disrupted supply and not demand, therefore policies aimed at stimulating aggregate demand would likely trigger huge negative effect. Without appropriate measures, the slowdown of economic growth, rise in inflation and deterioration of the balance of international payments would be inevitable.
Macro adjustment policies shall not be fully relaxed before production is restored. Usually expansionary fiscal and monetary policies are taken to stabilize the macro economy. However, the current epidemic and control measures will dent GDP growth mainly through disrupting productions and reducing supply, and some areas and industries are hit hard. As expansionary policies are mainly aimed at boosting aggregate demand, they would not be able to address the slowdown caused by the epidemic.
Policies should be carried out in three steps in a coordinated approach. The primary task is still curbing the spread of the epidemic. Secondly, restore production activities, resume logistics, and use administrative, financial and fiscal measures to aid industries and regions hit by the epidemic. Thirdly, under the premise that the epidemic takes a turn for the better and production is resumed, implement expansionary fiscal policy in conjunction with a relatively loose monetary policy, to restore market confidence, drive upstream and downstream demand through the supply chain, and thereby revitalize economic growth.
At the same time, emphasis should be placed on meso and micro policies rather than macro policies. Both monetary and fiscal policies have a lag, which means that the epidemic situation is likely to improve and the economy could rebound even before macro policies start to take effect. In addition, the pertinence of macro policies in dealing with this particular event is not strong enough. Economic policies should focus on targeted measures for specific regions, industries, departments and groups of people.
III. Preventing and controlling the spread of the epidemic and restoring production in a coordinated approach
As the epidemic outbreak continues to spread, the key priority is still to control its spread, especially in the affected areas. But for other areas, while ensuring prevention and controlling of the epidemic, overall plans should also be made to implement reform, development and social stability agendas – particularly those related to the building of a moderately prosperous society and poverty alleviation.
1. Restore population flow, logistics and production activities to restart the economic cycle
Local governments should timely guide enterprises to resume operations, especially those related to people's livelihood. In particular, logistics companies should resume work as soon as possible. To this end, local governments should ensure smooth flow of transportation, reduce operating burdens of logistics companies as much as possible, reduce unnecessary or repeated quarantine inspections on delivery drivers and personnel, and give priority to the logistics industry when allocating masks and other protective equipment. The logistics industry should resume operation as soon as possible on the premise of adhering to epidemic prevention and control standards.
Local governments should help enterprises deal with difficulties in resuming operations and meeting the requirement of prevention and control standards. They should strengthen communication with enterprises to learn their difficulties and take measures to alleviate their burdens.
As the epidemic outbreak continues to spread, in some areas it is hard to determine the specific time for resuming work; but local authorities could provide certain technical indicators such as new confirmed cases, population movements and how enterprise are conducting prevention and control measures, to provide reference for enterprises in their decision on when to resume production.
Local governments should also clarify protective measures required after resuming production. Government should guide enterprises to carry out necessary protective measures for employees and provide them with adequate protective supplies as long as the epidemic is not completely lifted.
2. Structural policies should be targeted and realistic
In addition to existing policies, the following can also be considered:
Provide more liquidity for troubled enterprises. Banks should not cut off or draw back loans to small and medium-sized enterprises (SMEs) and private enterprises that have temporary operational difficulties as a result of the epidemic; following production resumption, regulators should allow banks to issue working capital loans to enterprises with excessive debt ratios, and consider giving those enterprises a buffer period, for example allowing them to restore the debt ratio to normal levels within one year. The central bank, the Banking and Insurance Regulatory Commission and many banks have already introduced policies and measures to lower financing costs, so local governments need not impose additional requirements. But these measures will take time to be effective, and have no immediate effect on stabilizing the enterprises' current operations.
In the meantime, however, local governments should refrain from forcing banks to issue payday loans and other similar loans to enterprises. For enterprises, such kind of practice does not really solve the difficulties arising from reduction of income caused by business closure, instead it will increase the cost of debt for enterprises and operational risks that follow. For banks, it will increase credit risk, and dampen their enthusiasm and initiative to support anti-epidemic efforts and enterprises to resume production and operation.
Local governments should not force companies to pay employees amid business closure. While local governments are eligible to require companies to suspend operation and not to lay off employees, companies should make the decision on their own as to whether or not to pay employees during the extended holiday. The salary level should also be determined by companies themselves if they decide to pay workers.
Law enforcement and administrative penalties should be lenient amid ongoing efforts to prevent and control the spread of the epidemic. For individual SMEs and individual businesses who violate business regulations, administrative penalties should be imposed, but their business equipment and tools should not be disabled. This practice itself is illegal and is not conducive to the timely recovery of production and operation once the epidemic is over.
Local governments can consider setting up special purpose funds to help enterprises tide over the difficulties. Since enterprises suspend their operation as required by the government under a special circumstance, the government should assume the responsibilities while enterprises also need to shoulder their accountability to the society. Therefore, such funds should be used as subsidy, instead of investment funds. In order to reduce management costs and improve the efficiency and fairness of subsidies, it is suggested that a one-time subsidy amounting to a certain proportion of one-or two-month wages be given to SMEs and private enterprises. At present, the main way, and also a major difficulty for enterprises to calm their employees is to pay wages on time. Measures such as exempting rent and delaying tax payment are not enough to tackle this immediate difficulty. Helping enterprises solve this difficulty is giving confidence to enterprises and employees, which will have immediate effect. Therefore, decisions on such a subsidy should be made and implemented as quickly as possible.
Finally, exempting SMEs and private enterprises from taxes and fees for half a year or even one year is also a considerable policy choice.
3. Policies aimed at stabilizing aggregate demand should follow up as soon as production order is restored.
Loose fiscal and monetary policies can actually be taken to recover market confidence as long as the epidemic situation is improved, and production order is basically restored.
These policies may include allowing deficit rate to break 3%, speeding up efforts to increase the scale of special debt, issuing special construction bonds, strengthening "quasi-fiscal" measures such as increasing city investment and policy bank bonds issuance. In particular, the central government needs to give special care to local governments who face difficulties due to their fight against the epidemic and efforts to stabilize SMEs and private enterprises, in accordance with their actual conditions.
At the same time, monetary policy should lower reserve requirement, cut interest rates, inject liquidity accordingly, in order to reduce the financing costs of national bond, special bond, as well as corporate bond. Monetary policy space will likely get wider gradually considering that monetary policies of major central banks globally are loose, the exchange rate formation mechanism of Chinese yuan is becoming more flexible than before, and the impact of African swine fever on inflation rate will also gradually fade in the second half of this year. All of these factors will provide a sound policy foundation for a loose monetary policy as the epidemic outbreak comes to an end.
