Abstract: The COVID-19 has brought unprecedented impact on the Chinese economy. Policy responses need to be strategically targeted and make the best use of the situation. While continuing to fight the epidemic, policy measures should also adhere to the direction of reform and opening and try to achieve mid- to long-term goals.
I. The novel coronavirus outbreak has impacted the economy in ways different from the past
With the sudden and fierce outbreak of the coronavirus disease 2019 (COVID-19), China has taken a series of unprecedented measures for the sake of people's lives and the benefit of the whole world. The current situation is still grim and complicated, with prevention and control tasks at the most critical stage.
Based on the evolution of the epidemic so far, the COVID-19 has brought different economic impact that was rarely seen in the past, which calls for a clear understanding of the new situation and new trends.
The first difference is seen in the stagnation of supply, rather than the shrinkage of demand. Because of the large-scale city closures throughout China, almost all economically developed provinces in China have entered an emergency state, which, coupled with the extension of the Spring Festival holiday, puts economic activities into sudden stop. While on the surface, demand appears to have weakened, it is supply that has fallen short as most factories, shops and service businesses have suspended operation. While in the past, demand shrinkage caused by natural disasters, wars and other diseases was the major problem.
The second difference is that the survival of a large number of enterprises, especially small and medium-sized enterprises (SMEs), has been put under threat. While enterprises tended to be trapped in operational difficulties, including lack of liquidity, due to sluggish demand amid economic downturns in the past, many enterprises unable to operate due to the epidemic are faced with survival crisis.
The third difference is that a large number of labor force is floating population, and can hardly get back to work due to the epidemic, which has brought huge challenge to business resumption. The epidemic broke out around the Spring Festival holiday. Both enterprises and government agencies have interprovincial employees. Suspending operation and stopping population gathering and flow during the Spring Festival holiday may not have significant impact on the economy. But as a large number of employees are far from workplaces, once enterprises are required to resume work, there will be a delay in labor supply.
The fourth difference is reflected in the wide spatial layout of modern industrial chains which have become quite vulnerable to measures that could cut them off, such as city and road closures aimed to curb the spread of virus. Historically epidemic tended to occur locally, isolation measures were also limited to certain areas to curb the spread of diseases. And because the industrial chain was not complicated, most production and operation had little distance-related difficulties. Therefore, both the isolated areas and other areas could remain self-sufficient for a long time. Different from that, economic activities no matter in or outside the isolated areas will get interrupted this time, once the industry chain is disrupted.
The fifth difference is in the epidemic's impact on the international economy which is immeasurable. The spillover effect to the global economy is not limited to the reduction of GDP by a few percentage points, or the contraction of demand.
At the beginning, the reduction of tourists and business travelers from China affected the demand for tourism and catering in other countries. Then, the demand for trade declined as China's imports decreased. If economic activities in China cannot go back to normal soon, with raw materials, spare parts and final products produced in China unable to be exported, the production and operation of other countries could also be forced into a standstill, even when demand in these countries does not decrease.
II. A strategic approach to dealing with the epidemic - making the best use of the situation
In dealing with the novel coronavirus, many countries have their own political and economic considerations. While some measures are indeed aimed at preventing the epidemic, some are purely excuses used to curb China's development, decouple China in the industrial chain, or grab more share in some industries.
It is because of these factors, as well as the epidemic being only a temporary problem, policy responses need to be strategically targeted by making the best use of the situation, while maintaining the routine fight against the epidemic.
First, unwaveringly adhere to the direction of reform and opening and the goals of supply-side structural reform, whether in or after the epidemic. When addressing the economic downturn brought by the epidemic, policymakers should avoid going back to the extensive development mode, and continue to consolidate the results achieved from implementing the "five major tasks" (namely, overcapacity reduction, destocking and de-leveraging, lowering corporate costs, and improving weak links) and the "three tough battles" (namely, preventing and defusing financial risks, targeted poverty alleviation, and pollution control).
It should be noted that tremendous changes in life and work styles have occurred in the epidemic, which in itself is a significant factor that promotes the structural transformation of the economy. In the meantime, however, due to the nationwide isolation measures, the industrial and supply chains will be impacted to a large extent. Adding to this is the spatial separation between workers and their workplaces, which makes it even more difficult to restore the original industrial structure even when the epidemic is over, and production and operation are resumed. It can be said that the process of economic recovery after the epidemic will also be a process of industrial restructuring. The recent competition for workers among some regions and enterprises actually makes the prelude to industrial restructuring. And such an adjustment is exactly what the supply-side structural reform requires. A certain amount of stimulus measures are necessary in order to fasten economic recovery and stabilize employment, but the fashion and direction of the stimulus policies need to meet the requirements of reform and opening.
Second, many enterprises, especially SMEs are faced with a survival crisis instead of operational difficulties in the epidemic, and will continue to be so when productions resume. In such a case, stimulus measures will make little difference, but can lead to many side-effects.
Regardless of now or later, solutions to financing difficulties will assist SMEs in overcoming neither their current survival obstacles nor their operating barriers. At present, as a temporary countermeasure, fiscal policies should offer SMEs a one-time subsidy to help them pull through, thereby stabilizing enterprise operation and employment, which is also the basis for business resumption.
Third, accelerate the reform and development of the market mechanism, give full play to the market force, and ensure the market plays a decisive role in the allocation of resources. It is a people's war to fight against the epidemic. During the economic recovery, we need to respect the laws of the market as well. With a firm hand, we must keep off market meddling by local governments in the name of anti-epidemic measures. The major industrial restructuring after the outbreak appears also to be the re-allocation of market resources. Whether the resource allocation is effective is up to the role that the market plays.
In addition, even for the companies that will survive the epidemic, including those who will only survive with aid, some will definitely disappear during the restructuring afterwards. It must be made clear that aiding enterprises in the resumption of production is merely a temporary measure to bring economic activities back to normal as soon as possible, thereby stabilizing employment, but the government does not need and has no responsibility to guarantee these enterprises survival in future competition. At present, the People's Bank of China, the China Banking and Insurance Regulatory Commission, State Administration of Foreign Exchange and commercial banks have introduced numerous policies to fight the epidemic. Therefore, local governments should impose no more requirements on financial institutions, so as to avoid the re-occurrence of a large number of zombie enterprises occupying huge valuable financial resources.
Financial institutions such as banks also need to resume business. They desire to issue loans and launch business to make up for losses during the epidemic. These institutions are the main carriers for the efficient allocation of resources in the market. Under effective supervision, they should be allowed to carry out effective resource allocation amid the industrial restructuring based on market principles.
Fourth, increase investment in the R&D and applications of emerging technologies and medical and health industries. The epidemic has presented a real test for new technologies such as big data, cloud computing and artificial intelligence. Applications during the epidemic have revealed the advantages, as well limitations and deficiencies of these technologies, and pointed out directions for future improvement and development. Take smart city for example, developers used to develop applications based on imaginary scenarios. In the future, they will have more specific goals and directions. Other examples include home office, telecommuting, online education, etc., Use during the epidemic has screened out those industries and courses more suitable for such applications. The survival of the fittest in the medical and health technologies is even more obvious.
After the epidemic, these technologies and industries will transform to a stage of rational development emphasizing practical applications from the previous one of fanatic development based on imaginary frameworks and goals. This is quite similar to what happened in the IT industry around the year 2000. It is necessary for the government to re-examine the guiding policies and regulations that support the development of these technologies and industries.
In particular, governments and enterprises should take this opportunity to speed up R&D investment in these technologies, to make sure that China leads the world in these areas, and support such enterprises to go global. These enterprises need to improve in standard operation, that is, in providing technical products and services, protect the privacy of customer information and refrain from stealing or abusing such information.
Fifth, push forward the implementation of the Belt and Road Initiative, support enterprises to go global and actively participate in international industrial restructuring and competition. While continuing to fight the outbreak, China should also actively respond to the strategic considerations of other countries to gain a competitive edge in the global industrial restructuring. In fact, after each disaster, there would always be an opportunity for countries to compete for international political and economic status. Hence China must formulate targeted fiscal, tax and financial policies to guide its enterprises to actively participate in international competition. Special attention needs to be paid to the competition and layout of core technologies and key production steps to further improve China's industrial structure in the global supply chain. While supporting Chinese enterprises to go global, the government should also encourage them to respect the law and the market, so that these firms can truly compete in the market, without turning government support into inefficient assistance.
Sixth, speed up the building of Shanghai international finance center into an investment and financing center for the Belt and Road Initiative. On the one hand, it will contribute to reversing the wait-and-see attitude of global investors after the epidemic; on the other hand, it will distinguish Shanghai from other international financial centers; additionally, it could vigorously promote globalization through financial services and help Chinese companies take lead in global industrial restructuring and upgrade of supply chains.
Seventh, pay close attention to the development in other countries. The epidemic is likely to spread to more countries, in which case China should design a response plan to avert imported cases while continuing to fight the disease domestically. Moreover, it is necessary to study the possible impact of the evolving epidemic on the world economy, especially China's economy, and prepare policy responses. At the moment, China is in the early stage of work and production resumption. Due to the previous disruption of supply chains, there is expected to be fight for materials, in addition to competition for workers. Therefore, it is necessary to arrange for some capable firms to import materials (commodities, raw materials, parts, etc.) necessary for the resumption of production in China immediately.
