Curtain Raiser for Two Session Economic Policies

Key points by Tu Xinquan, Dean and Professor, China Institute for WTO Studies, University of International Business and Economics

Covid-19 impact on Chinese economy

• Like all other economies, China is hit hard by the Covid-19, but its trade is recovering better than expected.

• Trade with Asian neighbors grew in the past months; ASEAN replaced EU as China’s top trading partner.

• However external demand is not dependable, as it will be impacted by development of the pandemic.

De-globalization

• I once wrote a paper titled “Trump won't be the terminator of globalization”; I have to admit that I was wrong. It is not only because I was too confident in his rationality as a politician, as well as the resilience of US democracy, but also because I did not look into the deep reality of American people's discontent with the establishment and globalization.

• De-globalization was already there before the pandemic, but unfortunately, pandemic makes it even worse. The lockdown measures to fight the pandemic created a natural experiment of decoupling.

• Short term political pressure to decouple might prevail over economic trends, but in the long term, economics will finally win.

China’s response to U.S. threats

• China is not afraid of decoupling with the US, but China won’t be decoupling with the rest of the world.

• Isolating China is not possible, unless China wants to isolate itself.

• China should find more common ground for the cooperation through deeper and faster reforms and opening up, which is the best way to support globalization.

China’s GDP growth target

• I don't think it is necessary to set a certain level of GDP growth this year; it will not be helpful for policymaking.

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Key points by Li Wei, Professor of Economics, Associate Dean of Global MBA, Cheung Kong Graduate School of Business

Covid-19 impact on China’s private sector

• CKGSB Business Conditions Index (BCI) rebounded slightly in April.

• China’s private economy is still in the doldrums, while the immediate threat of the virus has been curbed, the shadow of the pandemic on the economy has yet to recede.

• Chinese private companies’ biggest three issues at the moment are resuming work, sales issues and foreign trade.

Lessons from China

• Social distancing is effective to reduce the rate of transmission, but its impact on economy is also huge.

• Cutting human interactions and disrupting transactions damages supply chains, which halts not just transmission, but also the economy as a whole.

• The economy resumption is not a car engine to be switched on and off at will. Instead, restarting a supply chain is a chaotic process.

China’s stimulus policies

• China did not respond very strongly with fiscal and even monetary stimulus, compared with other major economies.

• Chinese financial markets were calmer and largely due to de-leverage measures in previous years that has reduced financial fragility.

• Demand for unemployment assistance has also been weaker, partially because Chinese migrant workers return home, where the cost living is much lower.

China needs structural reforms

• Chinese national market should be integrated as a whole and unified market by pursuing competition policies and reducing incentives of local protectionism.

• The factors market must also now open up not just in China, but also hopefully globally, including land, labor and capital.

• The orientation of local government should be changed in the future, from the builder of local economy to the supplier of local public goods.

Global supply chains

• The rising costs in China in the past decade are the main driver of the re-organization of global supply chain. The trend is based on economics and it’s going to continue.

• The trade frictions created uncertainty rather than terror, which drive many company to rethink about their supply chain security and soundness. However, the decisions made on politics are unlikely to be beneficial in the longer term.

• For sectors like PPE production, it's probably a good idea not to concentrate in one geographic area, but having more distributed supply chain, to rationally reduce global risk.

China’s GDP growth target

• Just take a soft target as a guide. But if we were to certainly get rid of GDP, alternative mechanism is needed to serve as new KPI for local governments.

• Important to structurally shift local government’s incentive away from economic development into providing public goods to the residents.

• If we were to be able to do that, it would be a tremendous change in the Chinese economic economics as well as politics.

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Key points by Huo Kan, Assistant Editor, Director of Macroeconomics Desk, Caixin Media

China’s economic policy responses

• Phase 1 (late Jan - late Feb): the central government responded quickly to supply large-scale short-term liquidity to financial markets through open market, to stabilize market and support enterprises producing PPE.

• Phase 2 (late Feb - late Mar): the policy focus was on work and production resumption of small and medium sized enterprises in key sectors.

• Phase 3 (late Mar - now): policies are focused on how to help economic activity return to normal, by supporting recovery of investment and consumption, including consumption vouchers distribution and announcement of Special Treasury Bonds issuance.

Fiscal policy to expect

• Deficit: China is widely believed to raise this year’s budget deficit ratio above the long-held red line of 3%, and at least higher than 3.5%, predicted by majority of economists.

• SPB: Local governments are to issue more special purpose bonds (SPB). The total issuance amount will be among RMB 4 trillion ($560 billion). Ministry of Finance has approved local governments to issue RMB 2.3 trillion ($323 billion) SPBs by late April, and another RMB 1 trillion ($141 billion) is on the way.

• STB: China is to issue special treasury bonds (STB) for the first time since 2007.

Deficit monetization

• Deficit monetization is a very hot topic in recent days, which attracted many officials from the MOF and PBOC, as well as many economists, to participate in the discussion.

• The common view is that the fiscal policy should play a more active role. And fiscal policy and monetary policy should coordinate and cooperate.

• While the divergence is about is whether the PBOC should purchase national bonds directly from primary markets in order to help and make up the deficit.

• Caixin’s editorial believed that China shouldn't sacrifice fiscal discipline to revive the economy.

Reform plans to be set out

• China also takes it as an opportunity to advance more reforms. The Central Committee of the CPC and the State Council issued a sweeping reform document on May 18, vowing to improve China’s “socialist market economy”.

• How the central government will strengthen the coordination and cooperation of monetary policy and a macro prudential policy is expected.

• The reforms in land and labor markets and capital markets and state owned enterprises are also worth watching.

China’s GDP growth target

• The central government needs a KPI to guide business and local government officials. So maybe at the end there will still be a target this year.

• But it will set a more flexible target, such as a wider range. And the target itself is just a guidance, not a target you must achieve.

Special treasury bonds

• Whether special treasury bonds will be included in budget deficit, depends on the purpose of the fund. If used to fight against virus, maybe it would be include in the budget. But if used for infrastructure investment, then it would not be included.

• According to article published last week by Liu Kun, the minister of finance, he said that China would increase government investment through various channels. One of the channels is the special treasury bonds.

• In 1997, RMB 270 billion of special treasury bonds was purchased by four major state-owned banks. The central bank also supported to supply liquidity by cutting the reserve requirement ratio for state-owned bank, but PBOC didn't purchase bonds directly in the primary market.

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Key points by Nicolas Véron, Senior Fellow, Bruegel and at the Peterson Institute for International Economics

Growth and the virus

• The growth outlook is completely dependent on patterns of contagion and the extent to which the outbreak can or cannot be brought under control.

• Despite being infected first, East Asian countries have learned the lessons from SARS and kept the pandemic under control to a much greater extent, whereas Western countries have not, and must learn them now.

• The fiscal and monetary policies which we have seen cannot really be called stimulus, but should be referred to as disaster relief; we are still in the phase of disaster mitigation.

Global economic stability

• What we’ve seen so far is a collapse in the stock market, but in terms of financial stability, the system has held up quite well. We haven’t seen a collapse in credit, but have seen an expansion, which is good news.

• It is still early days because there will be a protracted downturn, even in an optimistic scenario.

• The question now is whether banks can “cross the desert,” if they have enough in reserve capital to absorb losses, continue lending and get to a situation where the economy gets back to normal. But it remains to be seen how that may hold up.

De-globalization

• Whereas in the past, the US business community pushed for openness with China and the security community were more reluctant, now it is the reverse, where the business community is growing more negative on China, but the security community realizes there is little to be gained from escalation.

• The main conflict is between the U.S. and China, but they only represent 40% of the global economy. The rest of the world is more divided, but on a purchasing power basis is even more important.

• China’s relationship with the rest of the world is more important than just the relationship with the U.S. The U.S. may become isolated from the rest of the world rather than the U.S. isolating China; most places are committed to economic openness and globalization.

Modern Monetary Theory

• There is no need to be overly worried about Modern Monetary Theory (MMT), as policymakers have not adopted it in the sense that they think deficits don’t matter.

• What they are acknowledging is that there are no inflationary pressures. If fiscal management remains measured, which means big fiscal policy responses to disasters, which is a pandemic, but not a complete meltdown in fiscal discipline, which would be something different, so the likelihood of inflationary pressures is actually quite low.

• We are in an environment that we don’t understand very well, and we don’t have a complete understanding of why we have low inflation. So policymakers should be cautious, but that doesn’t mean that it is inappropriate for countries which are hit by the pandemic to consider aggressive fiscal expenditure for disaster relief. There is reason to be aggressive with disaster relief, but perhaps not with stimulus.

• However, that question will be raised, maybe not immediately, but in the years to come.