Abstract: The author highlights two possible trends in the post-pandemic economy in China, which are the rise of consumption as the major driver of China's economic growth and the further boom of the digital economy. He also points out two potential risks that deserve close attention: one is that anti-globalization policies might find new drivers, and the second is the potential political and economic impacts caused by the extreme easing of fiscal and monetary policies in many countries.
I want to share three observations in terms of China's economic outlook amid the novel coronavirus pandemic.
I. Pay close attention to micro-, small- and medium-sized enterprises (MSMEs)
The COVID-19 pandemic is a global public health crisis which has significant economic and social impacts on many countries, and MSMEs are likely to have been hit the hardest.
Such impacts have also been reflected in the economic policies taken by many countries around the world. Take the Federal Reserve for instance. During the 2008 global financial crisis, the Fed and the Department of the Treasury took powerful policy measures to support major financial institutions and provided massive liquidity to buttress the whole financial system. The focus was to prevent a systemic collapse. This time, the Fed has also taken powerful policy measures such as cutting interest rate immediately and even promised to provide unlimited liquidity support. But one significant change was that while the focus was supporting systemically important financial institutions in the 2008 crisis, the focus is supporting MSMEs this time. Of course, the actual effects remain to be seen.
China has also gone through similar experience. The COVID-19 crisis has caused huge shock to many sectors in China, among which MSMEs have been hit the hardest, which is why I have been calling for the policy focus to skew toward supporting MSMEs over the past few months. Because there are a large number of MSMEs in China, contributing over 60% of GDP and over 80% of urban employment in the economy, once something goes wrong with MSMEs, it could evolve into systemic crisis.
The average longevity of China's MSMEs is about five years, indicating that it's normal to have about 20% of MSMEs go bankrupt each year. My concern is that should a large amount of MSMEs collapse all at once before the economy recovers, it could result in massive unemployment and even a skyrocketing of nonperforming financial assets; and once a malicious circle is formed among the three, it could eventually lead to a systemic crisis. Therefore, when dealing with the problems associated with MSMEs in China at present, we should pay more attention to potential systemic risks, rather than aiding individual enterprises.
At the beginning of the epidemic, China took lockdown measures in cities where the situation was extremely severe and implemented nationwide quarantine measures. During this period, forced to suspend businesses, many MSMEs did not generate any revenue for weeks or even months, while having to maintain expenditures, which brought huge shock to their cash flow. In the past, enterprises exit the market because of insolvency, while the sudden outbreak of the public health crisis has not only led to insolvency, but also cashflow crunch. We should attach high importance to this issue, because it will very likely evolve into a source of systemic risk.
There are even more important reasons for supporting MSMEs.
On the one hand, MSMEs contribute over 80% of urban employment in China, so in another sense, supporting MSMEs is conductive to social stability.
Over the past few months, China's central bank and the Ministry of Finance took many measures to support MSMEs, though liquidity support was relatively moderate compared with that of some of the European countries and the US. Other measures taken by China also vary from those in many other developing and developed countries. Some of the measures taken by other countries include encouraging firms to keep employees on the payroll (such as subsidizing firms without any layoffs), providing unemployment insurance, and handing out cash directly. These three policies not only pay attention to people's livelihood, but also the survival of MSMEs.
In fact, China shares the same policy objectives. In terms of fiscal policy, China has mainly rolled out three policy measures: investment in fixed assets, tax reduction, and providing public health expenditures. In addition, there are also measures including reducing rent, allowing delays in payment of social security funds, and providing subsidies to small and micro enterprises on their loan interest expenses. These are all very important means as they help enterprises overcome the most pressing difficulties and survive the crisis.
Helping MSMEs and ordinary people to survive is one of the primary goals of economic policy.
When the epidemic is brought under control and normal work and production is resumed, only if the enterprises are still alive, and people have money, can economic recovery really happen. If people can barely make ends meet, there will be no consumer demand even if the epidemic is contained. If we wait until all enterprises have closed down and workers have been laid off, it will be difficult to talk about economic recovery then.
II. Driving force of economic recovery has changed
The economic recovery this time may be relatively slow and full of uncertainty. During this process, China's economic structure will also undergo some changes.
We have suffered several major shocks in the past two decades. For example, during the Asian financial crisis in 1997 and the global financial crisis in 2008, China were all bitterly affected. At that time, China's approach was to increase investment in fixed assets so as to stimulate demand, stabilize the economy and secure employment, which were relatively successful both times.
The shock this time is different from the past ones. This is a public health crisis, not a systemic financial crisis.
Government responses to the epidemic fall into three categories: the first is to prevent and control the spread of the virus. The measures so far have been effective, but we need to remain vigilant. The second is to provide bailouts, which is to help people and MSMEs survive and support economic recovery. The third is to facilitate economic reconstruction. The previous four trillion-yuan fiscal stimulus, or the fixed asset investments provided by the government, are such policies to support economic growth. Amid this crisis there are also proposals for the development of new infrastructures and metropolitan areas.
I personally believe that there will be some major structural changes in the next round of economic recovery. The main reasons are:
First, this time export will be slow to recover, rather than bouncing back as soon as the economy revives as it did in previous times. Some time ago, many local governments in the southeastern coastal areas made every attempt to bring back migrant workers from inland provinces in order to have the manufacturing industry start operations, only to face the cancelling of export orders soon after production was resumed. This is an important manifestation of global crises facing us today.
A global public health crisis means that whether the global economy can rapidly return to its previous state depends not on the country that has done the best, but on the country that has done the worst. We need to control the pandemic and restore the economy together.
The second is that even if there is investment in fixed assets, the intensity will not be as great as the previous four trillion-yuan package. The space for monetary and fiscal policies today has changed significantly compared to a decade ago. Many scholars and officials are also reflecting on our policy in 2008. At that time, it was right to quickly roll out massive stimulus plans, but was the stimulus excessive and the withdrawal too slow? Did it slow down economic recovery? There are no consensus.
Of course, after so many years of development, the growth rate of the Chinese economy has declined, but the foundation has been enhanced. In the face of future development, there may be some different highlights.
Highlight 1, consumption may become an important force driving China's economic growth in the next round.
During the forty years of reform and opening-up, the Chinese economy has created two global economic stories. The first story is that China exports a lot of labor-intensive manufactured products. Many products in the international market are made in China. China's exports determine what the international market is like. In the labor-intensive, relatively low-end manufacturing market, China once played a pivotal role. The second story is that a lot of bulk commodity exporting countries experienced continuous economic booms beyond the normal economic cycle—for decades or even two decades—because China invested heavily in the bulk commodity market and created huge demands.
New stories will follow, and the next one coming may feature consumer spending in China.
But in the short run, there are still many difficulties in stimulating spending even if the virus is brought under control, especially spending by ordinary people without sound social security protections whose income has slumped over the past several months.
The second highlight is that the digital economy played a big role during the crisis. While most economic activities have come to a standstill since the pandemic put cities in lockdowns, virtual economy has boomed in contrast, with online shopping, virtual conferences and online teaching becoming increasingly vibrant. Meanwhile, restaurants have turned to serve take-out foods, and a lot of manufacturers have moved businesses online after closing their brick-and-mortar stores. None of these would have been possible without digital technologies.
The digital economy functions as a macroeconomic stabilizer. When the economy is under shocks, the digital economy can help at least cushion some of the blows, which is especially evident in the field of digital finance. While most banks have closed their branches amid the pandemic, online lenders have remained in business. I believe that the COVID-19 outbreak will push the development of digital economy to a new height, especially with the booming investments in new infrastructures that are essential to drive digital technological advances.
III. Two major post-pandemic risks
The pandemic will possibly restructure the global economic landscape, bringing about risks that worth the attention of every business and individual.
The first risk is that anti-globalization will find new momentum after the pandemic.
For example, the pandemic has exposed the vulnerabilities in the global supply chain, and led some governments and businesses to believe that they should localize the supply chain for facial mask production. I do not take that as the beginning of the anti-globalization process, however. Even before the virus broke out, we were already talking about the possibility of partial decoupling between the Chinese economy and the US economy. Up until now, I still think it will be a partial decoupling, but perhaps to a higher degree than before the COVID-19 attacked. This risk is worth special attention even if it is more about risk management or politics than about economics.
The second risk is that many countries are giving "whatever it takes" to intensify their fiscal and monetary policy efforts, with the United States, Japan and European countries resorting to unlimited quantitative easing measures. According to the latest forecast by the IMF, the debt-to-GDP ratio of developed countries after the pandemic is very likely to burgeon from the previous 105% to 122%.
I think it's understandable to do "whatever it takes" to prevent against systematic collapses in the face of big crises, but it could be hard to exit from these extraordinary measures after the crises are over. Many of the loose monetary policies rolled out amid the global financial crisis from 2007 to 2009 have remained in place, while the global economy has not seen significant improvement ever since. Extremely eased monetary or fiscal policies are usually quite popular when they are first introduced, but difficult to exit because austerity measures are much less welcomed. Hence, there remains the risk that countries may find it hard or even impossible to withdraw from the easing policies taken amid the pandemic, which means that liquidities will continue to flood the global market, and cause greater inflation pressure or place more strains on the financial market, even creating super blows at a financial crisis level. We need to fully understand these potential economic and political risks, and get prepared in advance.
