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As other economies panic over Covid-19, China can bide its time and stimulate its way to the future
- Other economies brought out the big guns last month, but not China. It is cautious about an all-out stimulus, after experiencing the side effects of the previous round
- Instead, Beijing should formulate a forward-looking stimulus programme, focusing on incentives for consumption as well as infrastructure investment
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After acting early and fast to rescue the economy, China turned more cautious about policy easing in March. Such inaction, in sharp contrast to developed countries’ unprecedented policy responses to the economic shock of the Covid-19 pandemic, seemed uncharacteristic of Beijing.
So why the calmness? First, China didn’t see a near-collapse of its equity market, an evaporation of liquidity in its money and credit markets, or a plunge in oil prices that threatened to wipe out its shale gas industry. The resiliency of its capital markets could have removed the urgency of a large policy response aimed at shoring up market confidence, as was the case in the United States and Europe.
Second, the Chinese economy has already hit rock bottom and is starting to bounce back, while most developed economies are still in free fall. Better visibility of the economic trajectory affords Beijing time to better design a targeted response, whereas elevated uncertainties elsewhere warrant a swift, blanket, or shock-and-awe approach.
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Third, China has suffered a great deal because of side effects of its previous all-out stimulus : rising debt, mounting overcapacity and decelerating growth over the past decade. The scars of that experience might have made Beijing more cautious about taking a “whatever it takes” approach again.
Finally, even if things are getting back to normal in China, the economy has yet to fully resume. Policy stimulus is less effective when the economy is running below its normal capacity. This means policy ammunition should be conserved for when the supply shock is over.
That last point describes the situation through March. But as various indicators are now pointing to near normalcy in the economy, in my view, conditions are ripe for more forceful action to aid recovery.
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