Abstract: Economic recovery is determined by development of the pandemic. Policymakers need to consider both short-term and medium-term effects of fiscal and monetary policies. The epidemic will usher in unexpected structural change which could foster new growth points and new types of demand. China should promote further opening-up and guard against potential financial risks. In addition, financial infrastructures need to be improved.
First, the development of the COVID-19 pandemic, which is in constant change, remains the most crucial issue.
More than two months ago, at a video conference of G30 (Group of Thirty), I told people the disease would put certain economic activities, especially services requiring human contact, on hold. If we could overcome the pandemic, we could lift the pause button. Later, some people called the pandemic "The Great Pause".
At that conference, some people held that there was no need to worry about virus spread in developed countries. Instead, people should be more concerned about developing countries, especially those in Africa as infrastructure and medical conditions in those countries are rather poor. It would be dangerous once the spread of the virus gets out of control.
I did not agree. Later, we saw from May to early June, the situation in some developed countries actually deteriorated. But the above prediction did not completely miss the mark, as the virus did spread quickly in some emerging market countries such as Brazil, India, and Russia.
"The Great Pause" also means that though macroeconomic policies may alleviate the impact of the pandemic, they cannot replace the efforts in controlling the virus. Only after the pandemic is brought under control can social isolation be truly lifted. We have to pay very close attention to this.
In the medium term, the control of the virus will depend on the development of vaccines; but in the short term, the results of virus control vary greatly across countries due to different measures adopted and policy preferences. In emerging market economies, especially in Latin America, the Middle East and South Asia, the number of confirmed cases has risen sharply. In the beginning, China had the largest number of confirmed cases, more than 80,000, but the number gradually declined, dropping to the 25th or 26th globally at present. In the second phase, developed countries became the epicenters, but their number of confirmed cases were surpassed later by that of the emerging market economies.
People talk a lot about countries that suffered bitterly from the disease, but pay little attention to countries with few confirmed cases. In South Korea, the number of infections is over 10,000 and in Japan it is more than 20,000. Compared with Western countries, outbreaks in these two countries are quite moderate. It is worth noting that the neighboring countries south of China, such as Vietnam, Laos, Cambodia, and Myanmar, have very few infections. So far, there are 382 cases in Vietnam and 0 deaths; 399 cases in Myanmar and 6 deaths; 171 cases in Cambodia and 0 deaths; 19 cases in Laos and 0 deaths. Compared with most countries in the world, these four countries are doing very well in preventing and controlling the spread of the virus. However, once crossing the southern border of Myanmar into South Asia, the situation becomes very severe. For example, in Bangladesh there are 200,000 confirmed cases, in India 1 million, and in Pakistan nearly 300,000.
We can see that the impact of the pandemic varies greatly across Asian countries, which deserves further study. In general, when formulating economic and financial policies, policymakers must first look at the situation of virus development and control.
Second, with regard to macroeconomic policy response, policymakers often focus on the short-term effect of fiscal and monetary policies, but they also need to consider the medium effect though the two are sometimes at odds. Further research is needed in this aspect.
Third, the pandemic will have a major impact on the micro level. Behavior patterns and demand patterns of enterprises and households will undergo major changes. We need to do sufficient research in order to respond to these changes effectively.
Fourth, the micro changes are interrelated with structural changes. After the pandemic, we will see structural changes that have not been foreseen. Therefore, we should avoid blindly seeking to restore the economy to its previous state. The structural changes are mainly reflected in the following two aspects:
First, people become more inclined to a "digital living", a concept put forward in the book Being Digital written in the 1990s. In the future, the digital trend will become even more prominent in various aspects such as lifestyle and ways of communication. Meanwhile, the concept of ESG (Environment, Social and Governance) will become more popular and gain more weight in market behavior and decision-making. We should pay enough attention to this change. At the macro level, the increase of total demand should not only be about restoring demand to the pre-pandemic level, but also about seeking new growth points and new demand in new areas, such as ESG and green development.
Fifth, opening up. Previously during the Sino-US friction, China took a right approach as the central government emphasized that "China will open its door only wider". After the outbreak of COVID-19, some countries turned to protectionism and adopted a "buck-passing" attitude towards the pandemic and issues beyond it. In contrast, China decided on the path of further opening up. But in this process, we also need to carefully consider the following issues:
First, the instigators of "buck-passing" and protectionist measures were behaving wrong at the first place, but must the other party retaliate? Countermeasures are necessary from the perspective of safeguarding national dignity as well as out of political and diplomatic considerations. But on the other hand, retaliation may negatively affect opening up and impair globalization and multilateralism. Therefore, China needs to weigh the pros and cons carefully.
In addition, the United States has provoked a series of incidents on the grounds of national security, setting a precedent for "practicing protectionism in the name of national security." Of course, China also highly values economic and other types of national security, but fighting a war in the name of security also hinders further opening up.
In the process of advancing opening up, we need to weigh the trade-offs and adopt a more open and supportive attitude towards globalization and multilateralism, so as to meet the challenges during and after the pandemic.
Sixth, financial stability. About 80% of crises in history originated from problems in the real economy which eventually manifested as financial crises.
For example, problems caused by mistakes in the US housing policy turned into the subprime crisis which quickly triggered the global financial crisis. It can be seen that problems in the real economy can easily accelerate the exposure of financial problems.
At present, the shock of the pandemic to the real economy has not seriously impacted the financial sector, with no sign of financial crisis. However, we still need to be very vigilant. Looking back at history, we can find that a crisis in the real economy is very likely to impact the financial system and cause financial instability which in turn will lead to further deterioration of the real economy and form a vicious circle. Therefore, it is necessary to plan ahead for potential financial instability.
Seventh, the pandemic places higher requirement on financial infrastructure.
On the one hand, the changes brought by "digital living" in the financial field may be mainly reflected in changes of the payment model. Under the new situation, the need for digital payment systems is growing, and there will be more technological innovations available in this regard. We will see many opportunities in the future.
On the other hand, the coverage of financial infrastructure should be expanded. It is necessary to consolidate and improve the financial infrastructure and increase its efficiency to prepare for and support new economic growth models.
In addition, the employment model in China's financial sector may also undergo tremendous change due to the trend of "digital living" and changes in the frequency of personal contact.
