THE ECONOMIST
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.