Abstract: As China's economy is in a critical period at present with downward growth rate and struggling to transform, and the epidemic will bring pressure on consumption, sluggish investment and worsen fiscal revenue.
Under internal and external factors, many small and medium-sized manufacturing enterprises will go bankrupt without steady control measures. More importantly, the industrial ecology of some vulnerable manufacturing industries will likely be destroyed, which will lead to more negative effects in long term.
China must attach as great importance to protecting industrial ecology, industrial chain, supply chain, and SMEs just as it does to fighting against the epidemic itself.
Comprehensive measures should be taken to stabilize the fundamentals of economic growth at about 5%. First, the flow of population should be well managed. While all cases confirmed and suspected, and people who have had close contact with confirmed cases, should be strictly quarantined, the flow of goods should remain functional. Second, more active fiscal policies should be adopted. Third, monetary policies that can facilitate expansionary fiscal policies should be adopted. Fourth, work that has been delayed due to the extended holidays for the prevention and control of the epidemic should be made up for. Fifth, local resources should be mobilized to introduce relief measures for SMEs in accordance with local conditions.
Three major problems should be addressed for the resumption of manufacturing. The first one is the shortage of workers resulting from the epidemic prevention and control measures. The second major problem is that supply chains of many industries have been disrupted as a result of the epidemic outbreak. The third one is that logistics is hampered in the outbreak.
To solve these three problems, reforms in the following aspects could be accelerated in addition to the current tax policies. First, policies for migrant workers to settle down in cities should be put into effect as soon as possible to address the problem of labor shortage in manufacturing. Second, abolish the housing provident fund system. Third, policies that can encourage enterprises to implement annuity system should be made and dredge the channels and mechanisms for annuity investment in the capital market. Fourth, logistics costs must be reduced.
With the resumption of work in most regions in China on February 10, the Coronavirus disease 2019 (COVID-19) prevention and control work has entered a new stage. Infection prevention and control has been comprehensively strengthened throughout the country with the whole nation being mobilized and medical resources being deployed nationwide. At present, while further preventing and controlling infection, the fight against the epidemic has also begun to enter a new stage of orderly resuming production.
It seems that the negative impact of the COVID-19 on the economy will be much greater than that of "SARS", at least for the moment. The impact of "SARS" on the economy concentratedly occurred in the second quarter of 2003, with the growth rate of GDP lower than that in the first and third quarters by 1.5 percentage points. Sectors including passenger transport, tourism, hotel, catering and retail were all greatly hit in short term, while investment and foreign trade were not significantly affected. Thanks to the demographic dividend in China then and its entry into the World Trade Organization (WTO), the "SARS" outbreak did not interrupt the upward trend of Chinese economy at that time. But the COVID-19 is quite different, with far wider scope affected compared to "SARS", covering almost all economically active and developed provinces and cities in China. As to the duration of the epidemic, duration of the COVID-19 with its epicenter in Wuhan will likely be longer than that of "SARS" with its epicenter in Guangzhou.
I. Negative impacts of the epidemic on China's economic development and manufacturing
As China's economy is in a critical period at present with downward growth rate and struggling to transform, and the epidemic will bring pressure on consumption, sluggish investment and worsen fiscal revenue.
What should have been a week long national holiday with more than 450 million people expected to be traveling and increase consumption became a week of epidemic prevention nationwide following the lockdown of Wuhan and the start of the first-level response mechanism for major public health emergency in other areas in China. Consumption related to hotels and cinemas have fallen sharply, and a large number of small and medium-sized enterprises (SMEs) are put under great pressure.
At present, the contribution of tourism to GDP in China has reached about 11%, and the number of employees working in tourism industry directly and indirectly has exceeded 100 million. On the one hand, the COVID-19 will drag down the overall employment and put tremendous pressure on overall social stability; on the other, it will also shock the "high-quality supply" which is conducive to promoting high-quality consumption and has been fostered by the supply-side reform in recent years in China. If the "high-quality supply" cannot keep up once the epidemic is over, it will not be easy to restart the economic cycle. In addition, foreign trade will also suffer heavy losses with many countries halting flights from and to China.
Under these internal and external factors, many small and medium-sized manufacturing enterprises will go bankrupt without steady control measures. More importantly, the industrial ecology of some vulnerable manufacturing industries will likely be destroyed, which will lead to more negative effects in long term.
The impact of disruptions of the industrial and supply chains caused by disruption of logistics and epidemic control measures is much greater than that of the China-US trade frictions, and once industrial transfer and substitution are formed as a result of the disruption, the manufacturing foundation some industries have laid during the past 30 years will disappear, which will be difficult to restore.
Therefore, we must attach as great importance to protecting industrial ecosystems, industrial chain, supply chain, and SMEs just as we do to fighting against the epidemic itself, and only in this way can we really overcome the difficulties.
II. Take comprehensive measures to stabilize the fundamentals of China's economic growth
Although the epidemic will not change the fundamentals of China's economic growth over the long term, its impact on manufacturing, SMEs and the overall economic transactions shall not be ignored in the short term. Comprehensive measures should be taken to stabilize the fundamentals of economic growth to stabilize the annual economic growth rate at about 5%.
First, the flow of population should be well managed. While all patients confirmed and suspected, and people who have had close contact with confirmed patients should be strictly quarantined, the flow of goods should be smoothed.
In order to effectively prevent and control the spread of the epidemic, some regions in China have taken strict measures. However, such efforts should not be pushed to extremes, such as blocking roads, halting flights and even sealing cities, as such measures will paralyze the logistics system which is the artery of national economy. Once the production of whole manufacturing industry is disrupted, which includes steel, chemical, power, equipment manufacturing, raw materials of light industries and electronics, spare parts and their sales, as a result of lagging logistics, it will not only cause huge losses, but also bring disastrous impact on the whole upstream and downstream industries.
Second, more active fiscal policies should be adopted. Due to the special circumstance this year, the conventional limit of government deficit not exceeding 3% of GDP could be broken, and the proposal of issuing additional RMB 1 trillion special treasury bonds is also suggested to be submitted to the National People's Congress (NPC) for approval to better support the reduction of taxes and fees for SMEs and transfer payments to epidemic areas.
Third, monetary policies that can facilitate expansionary fiscal policies should be adopted. For example, the central bank could increase its purchase of treasury bonds and further lower interest rates when the epidemic outbreak gets better in the second quarter.
Fourth, work that has been delayed due to the extended holidays for the prevention and control of the epidemic should be made up for.
In order to compensate for the losses of enterprises, it is suggested that enterprises should be allowed to make up for the work delayed due to the holiday extension according to their own situations. For example, employees could choose to make up for the work delayed at weekends or other holidays within one year. Some areas have already extended working days to make up for delay work following the State Council's decision to extend holidays.
Fifth, local resources should be mobilized to introduce SMEs relief measures in accordance with local conditions. These measures include Implementing comprehensive tax reduction and fee reduction for SMEs; providing appropriate extension to SMEs unable to repay their loans due to shutdown amid the epidemic; keeping investigating and dealing with risks associated with equity pledge of major shareholders of listed companies, and classifying the epidemic as a force majeure to cushion the risk of forced liquidation caused by the decline of the stock market.
III. Three major problems should be addressed for the resumption of manufacturing
Although many cities in China have required the resumption of work and production on February 10th, it is quite difficult for enterprises to resume production in fact.
The first one is the shortage of workers resulting from the epidemic prevention and control measures. It will take many procedures for workers to return to workplace. Local governments' concerns are understandable as nothing could be done except undertaking a series of procedures, which include applying for work resumption and then going through checks of various departments for approval, getting work resumption training, undertaking prevention and controlling measures and managing workers' movement. No detail is unimportant, and the efficiency can still be very high as long as all procedures are complete. However, it is still difficult for workers to return to work due to measures like road closure and village lockdown, with some even getting denied returning. Beyond these, workers’ household registration, residence, and quarantine duration are all major factors hindering the resumption of work.
The second major problem is that supply chains of many industries have been disrupted as a result of the epidemic outbreak. As most companies in China have a number of outsourcing parts suppliers, they are all facing shortages of workers, materials and components. These companies are located in different regions of different cities, and the different policies, procedures, and time to resume work in their own regions make it extremely difficult to match with each other.
The third one is that logistics is hampered in the outbreak. Except necessities for surviving the epidemic, raw materials and spare parts for production are not allowed to be shipped in and products cannot be shipped out as well even after production is resumed as checkpoints are set up everywhere in the country. At the same time, the restriction of population mobility makes it extremely difficult to expand the market, especially for foreign trade - more than 60 countries have restricted China's access to their markets, resulting in huge losses.
At present, there is indeed a contradiction between the control of the epidemic and the timely resumption of work. Such a stalemate requires us to be prepared for a protracted "war" against the epidemic.
But how long can our companies stand? For now, the government requires enterprises not to lay off workers and pay wages as usual, but it is difficult for firms to ensure payrolls if they are unable to produce products, and products cannot get sold even when produced as funds cannot be collected timely.
What we should really be afraid of is such a scenario in which when the epidemic is over, our factories also disappear. What is more terrible than the epidemic itself is when the society loses its "hematopoietic machinery".
IV. Suit the remedy to the case: Accelerate reform in four aspects
To solve the three problems above, reforms in the following aspects could be accelerated in addition to the current tax policies:
First, policies for migrant workers to settle down in cities should be put into effect as soon as possible to address the problem of labor shortage in manufacturing.
If 200 million of the 300 million migrant workers settle in cities, it will not only relieve the pressure of transportation during Spring Festival, but also quickly supplement urban labor force, effectively extend the working ages and annual working hours of migrant workers, and extend the duration of demographic dividend.
Second, abolish the housing provident fund system.
The housing provident fund system was introduced into China from Singapore in the early 1990s. Now as the real estate industry in China has already been marketized, and the commercial banks have become the main subjects of providing housing loans, the existence of the housing provident fund system is of little significance, and by abolishing it, cost of enterprises and workers can be reduced by 12%.
Third, policies that can encourage enterprises to implement annuity system should be made and dredge the channels and mechanisms for annuity investment in the capital market.
This is not only conducive to supplementing the pension and insurance funds, but also to the formation of large-scale long-term capital supply, which will lay foundation for the prosperity and stability of the capital market.
Fourth, logistics costs must be reduced. The epidemic will bring great opportunities to some "online" industries, which, in the meantime, also requires higher efficiency for logistics industry. It is suggested that the proportion of railway freight among various transportation modes should be increased, and the railway lines should be extended to various development zones, factories and mining enterprises as soon as possible, solving the "last kilometer" problem for railway transportation and reducing the cost of logistics overall.
The epidemic is as fierce, not only hurting people, but also hurting the country's economic operation. The country must be fully mobilized to strictly guard against economic risks just as we do in preventing and controlling the spread of the epidemic.
