China’s coronavirus stimulus is geared towards economic survival, but no more

At the close of the NPC annual meeting, Premier Li Keqiang made it clear that China will defy market hopes for large-scale stimulus in favour of targeted support to help the economy ‘survive’. China is right not to set a growth target to focus on job creation and long-term investment instead

Hao Zhou

Published: 5:00pm, 2 Jun 2020

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The press conference that follows the closing session of the National People’s Congress every year is show time for the Chinese premier. Unlike his predecessor, Wen Jiabao, who had a penchant for classical Chinese poetry, Li Keqiang favours a simple, unadorned style. But I believe that many were impressed by Li’s press conference wrapping up the NPC meeting on May 28, when he took a question about China’s policy orientation.

“We have been saying that we won’t flood the market” with excessive liquidity, he said. “It is still the policy. But extraordinary times call for extraordinary efforts. We are now providing water so that the fish can survive – fish will die without enough water, but there will be bubbles if we provide too much water.”

With these plain and simple words, he clearly outlined the framework that Chinese policymakers had designed for the coming year. By and large China has no intention of unveiling a 4 trillion yuan stimulus package like it did during the global financial crash in 2008: a move that led to a massive asset price bubble, and then a prolonged deleveraging campaign. However, China’s policy needs to be dynamic, and adaptable to the “extraordinary times” of Covid-19.

So what will China do? It is “providing water so that the fish can survive”, or making an extraordinary effort to provide fiscal and monetary support, and buy the economy and markets more time to recover from the impact of the coronavirus. However, the government will also carefully calibrate its response to ensure that liquidity injections do not create a new asset price bubble, which means that the support will be targeted.

05:11

Chinese Premier Li Keqiang on pandemic, China-US tensions and Hong Kong

Overall, China’s policy approach remains restrained, which is reflected in the size of the stimulus package. Although the Chinese authorities haven’t provided a specific number, the market consensus is that the package is around 4 per cent of Chinese gross domestic product. Li noted the view that the stimulus is less aggressive than expected, and stressed that Beijing is in a position to introduce more measures if and when necessary.

An unspoken concern, which could be a constraining factor on China’s policy space, is the risk of further escalation of tensions with the United States. With regard to US-China relations, Li spoke of “new problems and challenges”. He said China had rejected a cold-war mentality, although Foreign Minister Wang Yi had warned days ago of the rising risk of a “new cold war”.

To a certain extent, it is hairsplitting to define the conflict between the US and China as a new cold war. What is more important is that the seemingly endless tensions between the two superpowers have already changed the geopolitical and economic landscape, and will continue to do so.

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As such, it makes sense for Beijing to remain vigilant, keep some ammunition in reserve, and prepare for the worst, instead of playing all its cards in one round.

This explains why China has adopted a more practical approach and put greater emphasis on job creation. For the first time since 1994, China has not set a numerical growth target, citing the virus and global economic uncertainties. Li said the focus would be on employment, financial stability and poverty alleviation instead.

The government’s new target of creating 9 million jobs is lower than the previous year’s target of 11 million jobs. It is hoping to keep the urban surveyed unemployment rate at around 6 per cent, which is close to the current level but much higher than usual.

To be blunt, this is not an easy task at all. For example, the number of migrant workers plunged to 120 million at the of February, about 50 million below the usual level.

In other words, 30 per cent of them did not secure jobs after Lunar New Year. While the situation should have improved as the economy gradually recovered in the past few months, the scar left on the job market is unlikely to heal for a while, raising concerns that low-income families might face more difficulties in daily life. The burden of responsibility on Li is heavy.

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Moreover, China has other headaches. The US’ new restriction on Huawei is a reminder that the technology war between China and the US is intensifying, even though the dust has yet to settle on the phase-one trade deal signed at the beginning of this year.

In fact, China has many strategic investment projects in the pipeline for the long term. A “new infrastructure” campaign has been launched to help improve the country’s global standing.

These projects will be concentrated in seven areas: 5G networks; the industrial internet; intercity transport and inner-city rail systems; data centres; artificial intelligence; ultra-high voltage power lines; and car-charging stations. In fact, China’s hi-tech investment has outpaced its fixed-asset investment for years.

There is little doubt that China's push for a technological upgrade would not be good news to the US. While a full-blown trade war is unlikely as long as the phase-one deal is in place, fragile relations with the US will weigh on China's medium-term economic prospects.

All told, it makes sense for China to maintain a low growth forecast, and Li has set a very simple target. At the press conference, he said the country would still strive to achieve “positive and solid growth this year”.

Hao Zhou is senior emerging markets economist at Commerzbank

This article appeared in the South China Morning Post print edition as: A stimulus for survival

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