Abstract: In face of the novel coronavirus outbreak and consequent stagnated growth, digital economy has played an important role in stabilizing China's economy. Of particular note, online banks have helped secure cash flows for SMEs, which is critical to preventing against systematic risks, maintaining employment, and revitalizing the economy.
I. Digital economy has helped stabilize China's economy
The coronavirus outbreak and the countermeasures such as isolation have both had adverse impact on China's economy. Isolation is the most prevalent and perhaps most effective means against the highly-contagious novel coronavirus. However, such measures have dealt a blow to consumption demands in China because they restricted the movement of people. Besides, the outbreak coincided with the Spring Festival, which should have witnessed a boom in demands for restaurants, hotels, amusement parks, museums, cinemas and theaters. Moreover, a large number of events including forums and conferences have been postponed due to the epidemic. The negative economic impact have also spilled over to Hong Kong and other Asian countries including Japan, South Korea, Singapore and Thailand, and the key to curbing the impact is to effectively control the virus, especially in Wuhan. Nevertheless, as people go back to work after the Spring Festival, the massive intercity movements may trigger a new round of outbreak.
In dealing with the shock from the epidemic, China's digital economy sector has stood out and played an important role in stabilizing consumption and the macro-economy.
The current situation is different from SARS seventeen years ago, when e-commerce in China was still in the making. The SARS crisis subsided in June, 2003, a time that happened to coincide with the establishment of what was to become one of the most influential e-commerce platforms in China — Taobao. Today, along with Taobao stand multiple e-commerce giants such as Tmall, JD and Pinduoduo and myriads of online retailers. Together they are contributing to over 20% of total retail sales in China. Since consumers can hardly go outdoors amid the epidemic, a lot of them would turn to online shopping which partly makes up for the stagnant consumption growth.
Take restaurants for an example. Around 40% of restaurants in China are striving to expand their online take-out businesses, something that a half of them have never tried before. They are also well-equipped for the attempt, given a complete set of infrastructures to support online purchasing, food deliveries and mobile payments, which was nowhere to be found back in 2003. According to our estimates, turnovers from diners who eat in declined by about 70-80%, and turnovers from take-away orders, 30-40%, which means that restaurants will suffer greater losses without online business, despite that the number of eat-in and take-away orders both dropped amid the epidemic. This is an example of digital economy serving as a stabilizer.
This remains true if we compare other online and offline sectors. Despite that amusement parks, museums, cinemas and theaters have seen a slump in their businesses by as much as 90% or even worse, viewership of online films, shows and short videos has surged, while online education may have grown by a stunning 300% plus, with all teachers and students across the country having classes via videos or live broadcasts in the new spring semester.
In addition, with a national, unified online market coming into shape and growing transparency of price information, digital economy may have helped contain price hikes during the epidemic and stabilize the national economy. However, this assumption remains to be verified.
II. Prevent against systematic risks triggered by SME shutdowns
China's economic growth has been slowing ever since 2010. Some suggested that the government roll out massive stimulus programs, about which I have been rather cautious. There is no consensus as to what is an appropriate economic growth rate, while I usually look at two indicators — employment and financial stability. As long as both remain stable, I would not be too worried about GDP growth.
But now, both indicators tend to deteriorate, because the epidemic has directly pushed small and medium-sized enterprises (SMEs) into a life-or-death struggle. According to a survey by Ant Financial, over 70% of SMEs surveyed have been severely affected by the epidemic because they cannot restart operations, orders shrank significantly and logistics is clogged. At the same time, they still incur regular expenditures such as rental expenses, salaries and interest fees, etc. The accuracy of the data could be further assessed, but we must acknowledge that if most SMEs find it hard to survival, it could evolve into a systematic risk.
Generally speaking, about one-fifth of SMEs shut down each year. However, a sudden blow to half or even more of the SMEs that threatens their sound operation or even survival could be the start of a huge problem for the entire economy. The private sector, pillared by SMEs, contributes to 60% of China's GDP and 80% of urban employment. Besides, a lot of the assets held by small and medium-sized banks, which have offered large amounts of funds for SMEs, are non-performing loans. Given these factors, China's economic growth, employment and financial stability would all be strongly pressured if the piled-up problems in SMEs suddenly burst out.
It should be highlighted that what we worry is not the exits of a small proportion of SMEs, but abrupt shutdowns of a large number of SMEs. We must strive to prevent the vicious cycle of SME shutdown, rising unemployment and mounting non-performing loans, and the Chinese government should lead in that effort. The task is similar to what the US government did back in 2008, when it bailed out several large financial institutions not for the purpose of supporting the institutions or their employees and shareholders, but to prevent against a systematic collapse of the US financial system. So, any actions to be taken by the Chinese government are not aimed at sustaining a number of SMEs, but to maintain economic, employment and financial stability.
III. The key to economic recovery is securing cash flows for SMEs
Many businesses are trying to get back on track, although it still takes time to restore market confidence and economic activities. For example, digital economy is already playing an important role in supporting economic recovery — best illustrated by the boom in online education and online office. However, to cut off the vicious circle among business shutdowns, unemployment and the deterioration of banks’ assets, the key is to prevent against a massive cash crunch among SMEs. The survey by Ant Financial shows that about 80% of SMEs are short in funds, with 70% of them confident of staying in business as long as the financing problem is solved.
There are three ways to secure cash flows for SMEs: obtaining external funds, reducing operational costs, and increasing business revenues, in order of urgency.
The only way to increase business revenues is to bring the disease under control and get the economy back to normal as soon as possible. To this end, the government and the People's Bank of China can adopt proper counter-cyclical measures, especially providing subsidies for low-income and unemployed people, which could help maintain social stability and stimulate demands for the products and services of SMEs and boost their income.
It is more urgent to reduce operational costs of SMEs by all means. In the short run, reducing fees are more important than cutting taxes, because many SMEs do not even reap a taxable amount of revenue right now. Many local governments have made some good tries to lessen operational costs of SMEs, including postponing the payment of social security contributions, reducing or waiving rental expenses of state-owned properties as well as charges for water and electricity provided by state-owned enterprises. In addition, some well-positioned private businesses have also lowered or waived their charges of SMEs in various forms.
Of particular note, when addressing systematic risks, we must focus on maintaining overall stability before considering how to keep fiscal or financial robustness.
The most important way of securing cash flows for SMEs is to use financial instruments. In the past, businesses hit in catastrophes would rush to banks to withdraw their deposits and apply for new loans. Nowadays, online banks enjoy great advantages over traditional banks in providing funds for SMEs after a catastrophe like the coronavirus outbreak—their internet-based automatic procedures, and risk management capacities that do not require collaterals from borrowers.
During the epidemic, most of the lending businesses of traditional banks have paralyzed, while online banks such as XW Bank have not seen decreases in loan applications from SMEs. Statistics from Ant Financial also indicate that more than half of SMEs in China are planning to borrow from online lenders. Therefore, the People's Bank of China and regulators should provide greater support to online banks and city commercial banks. However, most of the special re-loans issued by the People's Bank of China at an aggregate amount of RMB 300 billion yuan flowed into national commercial banks, and it's not likely that they will be redirected to SMEs.
