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

Aidan Yao

Published: 2:00pm, 8 Apr 2020

Why you can trust SCMP

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.

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.

That was indeed the message from the State Council last week, hinting at an imminent and comprehensive stimulus package. Here are a few thoughts on what this package should or should not include.

From a standpoint of offsetting the economic shock, the stimulus should target the worst-hit sectors, with consumer-related industries – such as dining, tourism, offline entertainment and retail – at the top of the list.

How the greedy elite failed us, putting profit before pandemic preparedness

Some foreign governments have started to hand out cash to households to spur consumption, and pundits are urging Beijing to do the same. However, the effectiveness of such an approach is questionable.

Remember, China cut taxes and fees last year to the tune of 2 trillion yuan (US$280 billion). Even though not all of that went to households, it was a decent windfall. Yet, it failed to arrest a slowdown in retail sales growth.

While there is no timely data on savings, deposit growth accelerated by a full percentage point in 2019. One would think households are even more inclined to save in the current environment, given elevated uncertainties and risks of rising unemployment.

This is not to say that Beijing should neglect these sectors. But instead of throwing money at consumers, a better way to design the stimulus may be to offer incentives for consumption. For example, Beijing is likely to extend subsidies for electric vehicle purchases, and dole out another round of support for big-ticket purchases such as appliances.

Coronavirus: China’s investment in AI is paying off in a big way

An easing of housing market restrictions could also boost consumption and increase turnover. However, the scale of such easing, mainly at the local level, is likely to be limited by President Xi Jinping’s “houses are for living in, not speculation” policy mantra.

Instead, Beijing will probably still rely on investment, particularly infrastructure investment, to do much of the economic heavy lifting. This will be financed by a large increase in this year’s local government special bonds quota, and supplemented by the issuance of special treasury bonds.

Obviously, infrastructure investment is not free from side effects, either. It took years and strong political resolve for China to shake off the overcapacity problem.

But infrastructure investment is quite effective as a tool for spurring growth and generates results straight away, unlike tax cuts or cash handouts that could increase savings more than spending. It is also easier to implement, as local governments, their funding vehicles and state-owned enterprises are wired to carry out such stimulus measures efficiently.

Finally, it may generate longer-lasting growth impulses, if better infrastructure ends up fostering new industries and boosting labour productivity.

One way Beijing could mitigate the potential side effects is to focus on new infrastructure, including 5G, big data, artificial intelligence, smart cities, and of course, health care equipment. Not only can these investments make up for the lost output and help underpin the economy, they can also lay the groundwork for the next phase of China’s economic upgrade.

Aidan Yao is senior emerging Asia economist at AXA Investment Managers

Sign up now and get a 10% discount (original price US$400) off the China AI Report 2020 by SCMP Research. Learn about the AI ambitions of Alibaba, Baidu & JD.com through our in-depth case studies, and explore new applications of AI across industries. The report also includes exclusive access to webinars to interact with C-level executives from leading China AI companies (via live Q&A sessions). Offer valid until 31 May 2020.

This article appeared in the South China Morning Post print edition as: How Beijing could design a hangover-free stimulus plan

Post