The US Federal Reserve’s holdings of Treasury securities have increased by $2.3 trillion in the year to March 2021. Photo: TNS
Zhang Lin
Zhang Lin

Coronavirus stimulus: is the US or Chinese approach more dangerous?

  • China and the United States have taken very different fiscal and monetary stimulus approaches to tackling the coronavirus pandemic
  • US stimulus may lead to strong economic fluctuations in 2021-22, while China’s strategy may cause a lower growth rate in 2022 and beyond

When the coronavirus pandemic began rippling through the global economy last year, China and the United States responded with very different fiscal and monetary strategies.

China’s top leaders rejected the Ministry of Finance’s idea of monetising the fiscal deficit and exercised restraint in stimulus policies. The growth rate of money supply stopped rising in April last year when the pandemic was largely under control in China, allowing government bond yields to increase.

Stimulus has been scaled back further in 2021, with regulators focusing on controlling asset bubbles in the real estate and stock markets.

The US approach has been a completely different story. The US Federal Reserve’s holdings of Treasury securities increased by $2.3 trillion in the year to March 2021, sending broad money supply soaring.

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US Treasury Secretary Janet Yellen has said the size of government debt no longer matters and it is more important to focus on interest payments as a share of gross domestic product (GDP).

Soon after she made the comments, US President Joe Biden successfully introduced an additional US$1.9 trillion stimulus package late in February, even as stock markets continued rising and unemployment was falling.

So, in the long run, which policy approach will be viewed as better?

The US economic stimulus is working well. This is understandable, the health crisis was an exogenous shock – it hit the production side first. During the pandemic, people have stepped up spending on household goods, medical supplies and office equipment.

This differs from what happened during the global financial crisis in 2008, when the loss of wealth made Americans reluctant to spend, which is harder to rebound from than a production shortage.

But there is a risk that the stimulus has worked too well. High asset values built on a flood of liquidity will not be convincing to all investors; US asset prices will be very sensitive to the withdrawal of monetary stimulus or rising interest rates.

The loss aversion effect may produce plunges in stock and bond markets, as investors tend to use strategies like sell stops when stocks are falling to protect their positions.

The Fed’s operating space, therefore, is greatly restricted and it can only maintain interest rates near zero to control interest payments.

Furthermore, since monetary stimulus has brought income disparity and expanded transfer payments have been seen as a way to correct the income gap, any withdrawal could be viewed as politically incorrect in the US.

Transfer receipts have reached 27 per cent of real personal income in the US, a rate comparable to some European Union (EU) welfare states. But fiscal revenues as a percentage of GDP in the US are only 35 per cent of those in the EU bloc, this means that the US has expanded its risk exposure not only in the monetary sphere, but in the fiscal one, too.


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Beijing has expressed concern about economic bubbles in the US, but China’s economy is equally at risk.

Its macroeconomic performance is better than the US and its growth rate in 2021 is on track to be no less than 7 per cent due to the low comparison base from 2020. However, as most of the government’s limited stimulus went to the state sector, small entities have suffered irreversible losses.

Total profit among China’s private companies fell by about 10 per cent in 2020, the lowest point since such data has been made available. This means many small enterprises have exited or are about to exit the market.

As a result, China’s economy will face weak demand due to withering microeconomics. A further withdrawal of stimulus policies will reduce the risk of a debt and financial crisis, but it will make investment and consumption sluggish.

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The conclusion is that US stimulus policy may lead to significant economic fluctuations this year and next, while China’s strategy may lead to a lower growth rate in 2022 and beyond. Which result is worse?

It’s clear the problems facing China are more fundamental and intractable than those of the US, and will not be alleviated by economic stimulus alone.

Small firms vanishing from the market, declining profits in private sector and rising unemployment among migrant workers are hardly visible in statistical indicators. Fortunately, due to China’s high savings rate, most people who have lost their jobs during the pandemic will not immediately lose their livelihoods.


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China’s economy accelerated at end of 2020, but virus-hit annual growth lowest in 45 years

Although the state-owned sector can push up growth statistics through investment, it cannot mask the quieter risks confronting China’s economy, which are unfolding at a slower pace.

But if US capital markets were to fall sharply, they would do so with a bang. Corporate and residential balance sheets would decline rapidly, and the effects would soon flow on to the EU and Japan. Compared to China’s relative stability and prosperity, many would consider the US response to have failed. ​ 

As a result, China should not blindly withdraw from its stimulus plan, but find a way to use the policies to reach macro businesses and the private sector, otherwise long-term growth will be very weak. On the other hand, the US should figure out how to shrink its balance sheet, otherwise investors in Treasury bonds will eventually doubt the credit of the US dollar.

Zhang Lin is a Beijing-based independent political economy commentator.