Abstract: The impact of the super epidemic on the Chinese economy comes in three waves: The first wave is caused by domestic economic standstill, the second by the cost of reviving the economy from deep freeze, and the third by economic shutdowns across the globe. From April to June, exposed to the double impacts of the second and third wave, China's economy may be under more pressure than expected. Therefore, we need to evaluate previously set growth targets rationally, and shift to bottom-line management, based on which, we should introduce a policy mix of short-term stimulus and medium-term expansion.
I. As the epidemic's mega impact begins to show, we need to evaluate previously set goals rationally
Although how the epidemic would evolve worldwide and its potential economic, social and political impact remains highly uncertain, judging from its effects on the Chinese economy from January to February and its spread overseas, the mega impact of the outbreak has begun to show, and we could evaluate the super black swan stage by stage.
On the basis of the economic data from January to February, the GDP growth in the first quarter is expected to be about -5% to -10%. From the perspective of demand, total retail sales of consumer goods, investment and export all saw a double-digit decline from January to February. Even if we could resume full production and normalize the circular flow of economic activities by the end of March, the GDP growth in the first quarter would still be only -10%. From the perspective of supply, from January to February, the industrial value added fell by 13.5%, the index of service production fell by 13%, while the construction industry recorded an even steeper decline. Accordingly, the GDP growth in the first quarter is projected to be around -8%. At present, all the research teams are slashing their growth forecasts for March quarter and this year. Most of the teams abroad cut their demand side forecast to -10% for Q1. One thing is sure, China will register negative GDP growth in the first quarter.
Previously, China set the 2020 economic growth target at 5.5% to 6%. With negative growth in Q1, to achieve the 6% growth goal, the average growth rate in the next three quarters must exceed 9%, with growth in certain quarters exceeding 10%. To achieve 5.5%, the average growth rate in the next three quarters needs to reach 7.5%. Thus, to fulfill the target range, the future economic growth will need to show strong signs of an "asymmetric V-shaped rebound". Whether the rebound will occur and whether it will entail strong side effect require our scientific evaluation. However, it is certain that given the sustained impact of the pandemic and the highly uncertain future, growth targets should give way to bottom-line management, which carries distinct meanings at different stages.
First, bottom-line management at the current stage must preclude the resurgence of the epidemic. Second, the bottom-line management of the resumption of work and production should smooth out the economic cycle without denting the epidemic control, lest the economy comes to a standstill again. Third, on the premise of a healthy economic cycle, the bottom-line management must center on "propping up employment" and "meeting public needs", because employment is the not only the foundation of people's livelihood, but also a country's political, economic and social cornerstone. So the question is, to keep the surveyed urban unemployment rate under 5.5%, how fast should the economy grow, if we exclude the enrollment expansion of approximately 400 thousand postgraduates and secondary vocational school students and take into account a series of policy support? Fourth, on top of stabilizing employment, efforts shall be made to prevent local debt problems and capital chain problems from triggering systemic financial risks. In the future, these bottom-line management measures must be implemented progressively in stages and order of importance.
II. The impact of the super epidemic on the economy comes in phases instead of all at once. Therefore, we must pay more attention to the second and third wave of the impact.
Based on the five phases of a pandemic, there are possibly three different waves of short-term shocks on China's economy.
The first wave of impact is caused by economic standstill. The halving of China's multiple macroeconomic parameters in February has proved the huge direct loss caused by economic and social shutdowns. The exceptional exogenous shock has actually gone beyond the traditional macroeconomic analysis framework featured with shock, reaction, adjustment and recovery, for it has paralyzed the entire economic system instead of causing minor disturbance or periodic fluctuation. In this phase, the comprehensive prevention and control of the epidemic will bring the society and the economy to a standstill. Hence its short-term effect has surpassed the impact of any former endogenous disturbance .
The second wave of impact arises from the cost of reviving the economy from deep freeze. It is when the epidemic comes under effective control that the indirect economic loss gradually set in. Specifically, the most profound impact is the considerable cost brought by the "big push", which is indispensable to the restart of the economy after a shutdown. If China fails to arrange simultaneous resumption of work and production across the country, but only at the county level, the unsynchronized resumption of work and production will inevitably create bottlenecks in the industrial chain, supply chain, capital chain and order delivery. Thus in a spontaneous market, the full resumption of work and production as well as the normalization of economic circular flow will take a long time, or worse, become trapped in a low-level "vicious equilibrium". To overcome the market failure, we must rely on powerful administrative intervention and stimulus package to restart the economy, just like a wagon halted in snow should be given greater exogenous impetus to roll again.
Therefore, government coordination of work and production resumption and removal of relevant constraints is insufficient to normalize economic activities. A strong exogenous initial stimulus is required, particularly a mega demand stimulus, to induce the "ice-breaking effect", so that the "halted wagon" can overcome the high initial friction and generate self-sustaining endogenous power during the rapid startup. China's economy will be in such a reboot phase from March to May, introducing massive short-term stimulus to boost demand so as to fully restart the endogenous engine of China's economic activities.
The third wave of impact is the economic shutdown across the countries caused by the global spread of the pandemic. The impact will be unprecedented and unparalleled. The rapid spread of the epidemic will lead to a high rate of infection and mortality and cause panic in all countries, as governments across the world shift from laissez faire towards first-level management and control. Social isolation and lockdown of cities and countries will inevitably result in economic cessations. Eventually, this will bring about disruption in the global production system, industry chain and capital chain, as well as a temporary global economic shutdown. Currently, research teams have produced their pandemic forecasts, and nations have started to tilt towards the Chinese approach to epidemic control in all respects. The world economy is likely to see a global shutdown from April to June, which will generate the third wave of shock on the Chinese economy.
The third wave of impact will be much more severe than the first and second waves in both scale and depth. If the shutdown of global economy persists from April to June, that is, the same time the China's economic activities fully restores, industries and businesses that need to import raw materials or export end products will suffer an even more serious blow. Therefore, for these sectors and firms, we must take into account every aspect of the third wave of impact when offering them financial reliefs and arranging work and production resumption.
III. It is of great significance to introduce a policy mix of short-term stimulus and medium-term expansion based on bottom-line management.
Crisis relief cannot be achieved overnight. Only when the above three waves of impacts are mitigated can China's economy gradually transit from emergency response stage to normalization stage of business cycle. At that point, we could eventually upgrade the bottom-line management to "ensuing economic growth", develop a solid path for implementing systematic expansion, and effectively manage the scope, approach and implementation of the expansion plan on the basis of bottom-line management.
The first wave of the epidemic's impact on China's economy is coming to an end, while the second wave just commenced, and the third wave is brewing. Considering the progress of work and production resumption and the spread of the epidemic worldwide, China's economy may be exposed to the double impacts of the second and third wave from April to June, hence China's economic growth in the second and third quarters may be under more pressure than expected. Accordingly, policies designed upon the previous partial understanding of the epidemic's impact must be reoriented and readjusted.
First, on top of the bottom-line thinking, we should prepare for the worst and design adjustable, flexible, expandable and diversified policy responses, rather than constraining ourselves to "new infrastructure construction".
Second, short-term stimulus must be combined with medium-term adjustment and expansion. Short-term stimulus is intended to provide the "big push". With government intervention, we could resume work and production synchronously so that the economic cycle could generate self-sustaining endogenous power with exogenous impetus.
Currently, stimulus is unacceptable to quite a few people, who would turn pale at the mention of the word "stimulus". However, to overcome the high friction derived from the economic shutdown, the "big push" is needed to induce the "ice-breaking effect". Therefore, it is imperative to issue consumer vouchers and provide subsidies to enterprises on a much larger scale, especially to individual businesses and small and micro enterprises. Recently, due to the unprecedented impact of the epidemic on the market players, the United States and European countries have rolled out aggressive subsidy plans. Immense efforts must be taken in order to ensure that the short-term impact doesn't turn into a medium and long-term impact. The current short-term stimulus must focus on consumption subsidies provided to middle and lower-class consumers, reliefs to micro, small and medium-sized enterprises, and support to the most impacted industry sectors. The adjustment to the reform that everyone is concerned about may be reflected in the short-term stimulus, but the overall updated reform plan should be released in a timely manner after the economic cycle returns to normal.
Third, the fiscal deficit should not only be allowed to exceed 3%, but also be allowed to exceed 3.5%. If the budget deficit rate goes up to 3.5% from 2.8% last year, the budget expenditure this year could increase by RMB 1 trillion, approximately USD 140 billion, which is still insufficient to cope with the impact of the once-in-a-century epidemic or the impact of the global economic shutdown. Therefore, extraordinary measures in terms of fiscal deficit must be taken.
Fourth, monetary policy must switch to a moderately loose stance, including a substantial reduction in the reserve ratio and interest rates. In particular, with reserve ratio requirement of nearly 10%, we shall consider converting the over RMB 10 trillion that is frozen in the bank reserve into treasury bonds or special bonds, to make room for easing fiscal and monetary policies. When loose monetary policies prevails, China's conservative policies, to a certain extent, will cause China to bear the excessive costs brought by the pandemic and the global economic shutdown.
Fifth, we must choose the right timing to unveil policies. At the wrong timing, the policies will lose their window of effectiveness, and generate superabundant adverse effects. It is imperative to attach more importance to the timing, priority and window of effectiveness during the reform advancement. Amid the epidemic, there is an emerging consensus that now is a window to convert the crisis into an opportunity. However, it may be difficult to seize the opportunity and create institutional bonus, if we fail to develop a sound combination of the path and details of the reform and opening-up.
Restarting the economy after the shutdown requires a "big push" for sure, however, the "big push" should never simply mean promoting infrastructure construction, instead, it should focus on stimulating short-term consumption through crisis relief, which will help maintain economic growth at the same time.
From the medium-term perspective, economic stimulus should be persistently oriented towards people's livelihood, normalization of the economic cycle and bottom-line management. Firstly, the meaning of economic stimulus has to be adjusted in a timely manner along with the change in principle contradiction and principle aspect of contradiction at different stages of epidemic control and economic recovery. Secondly, there have to be significant changes in the practical subjects at different phases. Thirdly, there have to be a series of major changes in the core tools and combination models for policy implementation. If sufficient prospective research and policy reserves are available in these areas, we will not repeat the mistake of the "four trillion" stimulus plan of 2009, and we will overcome the current hostile mentality towards stimulus policies. Only in this way can we conquer the challenges that lie ahead.
