The government steps up support, not to boost growth but to ensure social stability
RARELY HAVE plans in China fallen apart so
swiftly, so publicly. On January 12th the leaders of Hubei declared that the
province’s GDP would grow by 7.5% this year. They also vowed to make the
province a stronger link in high-tech supply chains. They made no mention of a
mysterious new virus that was causing pneumonia and spreading fast through the
cities and towns under their watch. But less than two weeks later its scale was
too big to ignore. Under intense pressure to act, they placed the entire
province under quarantine, hemming in 60m people and rendering their flashy
economic targets almost certainly unreachable this year. Their focus instead
shifted to stopping the illness and keeping people supplied with necessities.
The lurch from confidence to anxiety has echoed throughout China. In the months leading up to the coronavirus outbreak, the stockmarket had rallied. Businesses were upbeat about their prospects this year, not least because China and America had finally reached a deal in their long-running trade war. But over the past two weeks, as the government has begun a full-scale fight against the epidemic, optimism has crumbled.
Share prices in mainland China have fallen by 10% since January 20th. Factories and offices, already shut for the new-year holiday, were supposed to reopen in recent days but many have stayed shut. Most provinces have ordered them to remain idle until February 10th, if not longer. Poultry farmers have warned that their chickens might starve because roadblocks have snarled their feed supplies. Businesses have started dipping into their cash reserves. Restaurants and hotels have been hit especially hard because few people anywhere in China, not just Hubei, dare venture out. In one interview that was shared widely on social media before being censored, Jia Guolong, founder of Xibei, a popular restaurant chain, said that if the lockdown persisted for a few more months, vast numbers could lose their jobs. “Wouldn’t that be an economic crisis?” he asked.
Analysts have rushed to cut their forecasts for economic growth. The consensus had previously been that GDP would expand by about 6% year-on-year in the first quarter. Now several think that 4%, the slowest since China started publishing quarterly figures in 1992, is more likely, with risks firmly tilted to the downside. As with past epidemics, there is sure to be a strong recovery when the virus is eventually contained. But there is much uncertainty about when that might be. Three unknowns will dictate the recovery’s timing: how long it takes to bring the virus under control; how long after that the government relaxes its heavy-handed restrictions on daily life; and how long after that people resume the whirl of activity that normally makes the Chinese economy so vibrant.
For economic policy, this presents a challenge. Usually, the further into the future you peer, the greater the uncertainty. But China’s officials can be reasonably confident in assuming that growth will return to its pre-virus trajectory next year. It is the next couple of months that are the black hole. In this environment flexible measures to help people and companies through a difficult patch are most sensible. These can be pared back when the rebound arrives. Getting them right, though, is not easy.
It is worth noting what China is avoiding, so far at least. Some have speculated that officials will unleash a big stimulus, perhaps a vast new array of infrastructure projects, to get growth back up to speed. But it is too soon for that. The government does not want people on building sites or in factories at the moment. Much of its efforts are aimed at keeping them in their homes, in order to prevent the virus spreading. Moreover, there is a lag between unveiling infrastructure plans and breaking ground. The boost from projects announced today could start as the economy is gathering steam on its own, leading to overheating.
Instead, China is using a combination of temporary cash support, market interventions and forbearance to get through the crisis. On February 3rd the central bank made headlines by injecting 1.2trn yuan ($172bn) into the financial system (it bought treasury bonds from banks which promised to buy them back within 14 days). Banks will probably suffer from rising loan defaults in the coming weeks, and this gives them more cash to work with. When the repurchase agreements come due, the central bank could choose, in effect, to extend them if needed.
Officials are meddling in the market (or, as they would say, managing it) out of concern that investors may be too pessimistic in the near term. Because many companies have pledged their equity as collateral for loans, they would need to sell assets as share prices fall, only adding to the downward pressure. So regulators, having already delayed the reopening of the stockmarket after the new-year holiday, told brokerages to bar clients from short-selling, according to Reuters. Chinese shares still dropped by 8% on February 3rd, their steepest one-day fall since 2015, but they were largely catching up with the Hong Kong market, which had been open the previous week. On February 4th, shares rose a little more than 1%, suggesting that the stabilisation tactics were working.
Finally, officials have been advocating and orchestrating forbearance on various fronts. Shanghai was due to increase companies’ social-security contributions on April 1st. The city has delayed that by three months, saving firms an estimated 10bn yuan. In Beijing, the municipal government has encouraged landlords to cut their commercial tenants’ rents; in exchange, it will provide them with subsidies. And regulators have called on banks throughout the country to roll over loans to companies, such as small manufacturers, which would otherwise lack the cash buffers to survive the work stoppage.
Even as the death toll continues to mount, some officials are already thinking about economic distortions that have arisen in the course of the battle against the epidemic. Hospitals have faced shortages of protective equipment such as masks, gowns and gloves. So the government has called on companies to increase production. Many, feeling a sense of duty, have heeded the call. But as Liu Shangxi, an adviser to the finance ministry, has noted, this means that medical-equipment firms will suffer from severe overcapacity after the crisis passes. The government should thus be ready, he argues, to compensate them.
Such proposals are a far cry from the bold growth-and-investment plans that Hubei’s provincial leaders laid out less than a month ago. Yet the priority now is not to stimulate the economy or climb the technology ladder but to ensure that society remains stable as the quarantines and controls drag on. China’s grim new reality is that everything, economic policy included, revolves around the question of how to beat the virus.